ARKANSAS TEACHER RETIREMENT SYSTEM 2004 COMPREHENSIVE ANNUAL FINANCIAL REPORT A Pension Trust Fund of the State of Arkansas 1 ANNUAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2004 ARKANSAS TEACHER RETIREMENT SYSTEM INTRODUCTORY SECTION Letter of Transmittal ........................................................................................................................................................4 Board of Trustees ........................................................................................................................................................... 7 Professional Consultants ................................................................................................................................................. 8 Organizational Chart and Administrative Staff ........................................................................................................... 10 FINANCIAL SECTION Basic Financial Statements: Statement of Plan Net Assets ...................................................................................................................................... 12 Statement of Changes in Plan Net Assets ................................................................................................................... 13 Notes to Basic Financial Statements ............................................................................................................................ 14 Required Supplementary Information: Schedule 1 - Schedule of Funding Progress ................................................................................................................. 22 Schedule 2 - Schedule of Employer Contributions ..................................................................................................... 23 Schedule 3 - Notes to Trend Data .............................................................................................................................. 24 SUPPORTING SCHEDULES Schedule 4 - Schedule of Administrative Expenses .................................................................................................... 26 Schedule 5 - Schedule of Investment Expenses .......................................................................................................... 27 Schedule 6 - Schedule of Payments to Consultants .................................................................................................... 28 INVESTMENT SECTION Investment Consultant’s Report .................................................................................................................................. 30 Investment Policies and Procedures ............................................................................................................................. 32 Asset Allocation Analysis .............................................................................................................................................. 37 Schedule of Investment Results ................................................................................................................................... 38 Ten Largest Holdings - Fixed Income ........................................................................................................................... 40 Ten Largest Holdings - Domestic Equities ................................................................................................................... 41 Ten Largest Holdings - International Equities .............................................................................................................. 42 Ten Largest Holdings - Arkansas Related Investments ............................................................................................... 43 ACTUARIAL SECTION Actuary’s Certification Letter ....................................................................................................................................... 46 Exhibit 1 - Computed Actuarial Liabilities ................................................................................................................... 48 Exhibit 2 - Employer Contribution Rate ...................................................................................................................... 49 Schedule of Active Member Valuation Data ............................................................................................................... 50 Schedule of Retirees and Beneficiaries Added to and Removed From Rolls ....................................................................................................................................... 50 Solvency Test ................................................................................................................................................................. 51 Summary of Actuarial Assumptions and Methods ...................................................................................................... 52 Table I - Single Life Retirement Values ......................................................................................................................... 54 Table II - Probabilities of Retirement for Members .................................................................................................... 55 Table III - Probabilities of T-Drop for Members ......................................................................................................... 56 Table IV - Teachers Separations From Active Employment Before Age and Service Retirement and Individual Pay Increase ......................................................................... 57 Table V - Non-Teachers Separations From Active Employment Before Age and Service Retirement and Individual Pay Increases ........................................................................ 58 Analysis of Financial Experience .................................................................................................................................. 59 Comments ..................................................................................................................................................................... 60 STATISTICAL SECTION Schedule of Revenue By Source .................................................................................................................................. 62 Schedule of Expenses By Type ..................................................................................................................................... 62 Schedule of Benefit Expenses By Type ........................................................................................................................ 63 Schedule of Retired Members By Type of Benefit ...................................................................................................... 64 Schedule of Average Benefit Payments ....................................................................................................................... 65 Schedule of Participating Employers ............................................................................................................................ 66 ANNUAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2004 2 INTRODUCTION ANNUAL REPORT FOR FISCAL YEAR ENDED JUNE 30, 2004 REPORT ANNUAL ARKANSAS TEACHER RETIREMENT SYSTEM Letter of Transmittal December, 2004 The Honorable Mike Huckabee and Members of the 85th General Assembly Dear Governor and members of the General Assembly: The Arkansas Teacher Retirement System (the ‘System’ or ATRS) is pleased to submit this 62nd Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2004. It provides comprehensive information on the retirement plan that we administer. Responsibility for both the accuracy of the data and the completeness and fairness of presentation rests with the System. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and presents fairly the System’s financial status and changes in financial condition. The 2004 Financial Report is presented in five sections. Contents are summarized below (a detailed Table of Contents may be found on Page 2). o Introductory Section: Contains this Transmittal Letter, organization chart and the Board. o Financial Section: Provides the System’s financial statements, required supplementary information, and supporting schedules with additional infor- mation about the System’s expenses. o Investment Section: Includes the investment consultant’s report, investment policies, asset allocation, and investment results. o Actuarial Section: Provides the certification letter from the independent actuary, supporting schedules, and a summary of plan provisions. o Statistical Section: Presents schedules and tables of comparative data related to the membership, active and retired, of the System. On March 17, 1937, ATRS was established by Act 266 of 1937. ATRS is a combination contributory/non-contributory retire- ment system governed by the State’s retirement law, Chapter 24 of the Arkansas Code. ATRS is one of five State-supported retirement systems and provides retirement, disability and survivor’s benefits to employees of Arkansas public schools and edu- cationally related agencies. The system consists of 404 participating employers (see pages 66 - 68). Since beginning my tenure in January of 2003, ATRS has worked to earn the trust of the public, our members and our employ- ers. We will continue to strive for excellence in everything we do. We have taken a fresh look at the goals and duties of this