Legislative Audit Division State of Montana Report to the Legislature Financial-Compliance Audit December 2004 For the Two Fiscal Years Ended June 30, 2004 Teachers' Retirement System Department of Administration A component unit of the state of Montana This report contains the financial statements and our independent auditor’s report for the Teachers’ Retirement System for the two fiscal years ended June 30, 2004. The report contains one recommendation related to the actuarial soundness of the retirement system. Direct comments/inquiries to: Legislative Audit Division Room 160, State Capitol PO Box 201705 04-09 Helena MT 59620-1705 Help eliminate fraud, waste, and abuse in state government. Call the Fraud Hotline at 1-800-222-4446 statewide or 444-4446 in Helena. FINANCIAL-COMPLIANCE AUDITS Financial-compliance audits are conducted by the Legislative Audit Division to determine if an agency’s financial operations are properly conducted, the financial reports are presented fairly, and the agency has complied with applicable laws and regulations. In performing the audit work, the audit staff uses standards set forth by the American Institute of Certified Public Accountants and the United States Government Accountability Office. Financial-compliance audit staff members hold degrees with an emphasis in accounting. Most staff members hold Certified Public Accountant (CPA) certificates. Government Auditing Standards, the Single Audit Act Amendments of 1996 and OMB Circular A-133 require the auditor to issue certain financial, internal control, and compliance reports. This individual agency audit report is not intended to comply with these reporting requirements and is therefore not intended for distribution to federal grantor agencies. The Legislative Audit Division issues a statewide biennial Single Audit Report which complies with the above reporting requirements. The Single Audit Report for the two fiscal years ended June 30, 2005, will be issued by March 31, 2006. The Single Audit Report for the two fiscal years ended June 30, 2003, was issued on March 23, 2004. Copies of the Single Audit Report can be obtained by contacting: Single Audit Coordinator Legislative Audit Division Office of Budget and Program Planning Room 160, State Capitol State Capitol PO Box 201705 Helena MT 59620 Helena MT 59620-1705 Phone (406) 444-3616 MEMBERS OF THE LEGISLATIVE AUDIT COMMITTEE Senator John Cobb Representative Dee Brown Senator Mike Cooney Representative Tim Callahan Senator Jim Elliott, Vice Chair Representative Hal Jacobson Senator John Esp Representative John Musgrove Senator Dan Harrington Representative Jeff Pattison, Chair Senator Corey Stapleton Representative Rick Ripley LEGISLATIVE AUDIT DIVISION Scott A. Seacat, Legislative Auditor Deputy Legislative Auditors: John W. Northey, Legal Counsel Jim Pellegrini, Performance Audit Tori Hunthausen, IS Audit & Operations James Gillett, Financial-Compliance Audit December 2004 The Legislative Audit Committee of the Montana State Legislature: This is our financial-compliance audit report on the Teachers’ Retirement System (System), a component unit of the state of Montana, for the two fiscal years ended June 30, 2004. This report contains one recommendation to the Teachers’ Retirement Board related to the actuarial soundness of the System. We issued an unqualified opinion on the System’s financial statements for the fiscal years ended June 30, 2004, and 2003. Our opinion on the System’s financial statements is also contained in the Teachers’ Retirement System Annual Report. The annual report contains additional background, statistical, and actuarial information not included in this audit report, which may be of interest to legislators or the public. Copies of the annual report can be obtained from the Teachers’ Retirement System or accessed on its website. The annual report for fiscal year 2003- 04 is expected to be available in late December 2004. The System’s written response to the audit is included at the end of the audit report. We thank the Executive Director and his staff for their assistance and cooperation throughout the audit. Respectfully submitted, (Signature on File) Scott A. Seacat Legislative Auditor Room 160, State Capitol Building PO Box 201705 Helena, MT 59620-1705 Phone (406) 444-3122 FAX (406) 444-9784 E-Mail [email protected] Legislative Audit Division Financial-Compliance Audit For the Two Fiscal Years Ended June 30, 2004 Teachers' Retirement System Department of Administration A component unit of the state of Montana Members of the audit staff involved in this audit were Pearl M. Allen, Chris G. Darragh, John B. Fine, Melissa Heinert, and Laura Norris. Table of Contents Appointed and Administrative Officials...................................................ii Report Summary....................................................................................S-1 Introduction.................................................................................................................................................1 General......................................................................................................1 Background...............................................................................................1 Findings and Recommendations................................................................................................................5 System Not Actuarially Sound.................................................................5 Independent Auditor’s Report & System Financial Statements, Required Supplementary Information, and Supplementary Information....................................................................................A-1 Independent Auditor’s Report..............................................................A-3 The Teachers’ Retirement System Management’s Discussion and Analysis, Financial Statements, Required Supplementary Information, and Supplementary Information......................... Management’s Discussion and Analysis..............................................A-5 Statement of Fiduciary Net Assets June 30, 2004 and 2003........................................................................A-8 Statement of Changes in Fiduciary Net Assets Fiscal Years Ended June 30, 2004 and 2003........................................A-9 Notes to the Financial Statements.......................................................A-10 Schedule of Funding Progress............................................................A-17 Schedule of Contributions from the Employer and Other Contributing Entities..........................................................A-18 Notes to the Required Supplementary Information............................A-19 Supporting Schedules Fiscal Years Ended June 30, 2004 and 2003......................................A-21 System Response.....................................................................................................................................B-1 Teachers' Retirement System................................................................B-3 Page i Appointed and Administrative Officials Teachers’ Retirement Board Term Expires Tim Ryan, Chair Big Fork 7/1/09 Mona Bilden Miles City 7/1/06 Scott Dubbs Lewistown 7/1/08 Barbara Foster Townsend 7/1/06 Kari Peiffer Kalispell 7/1/07 James Turcotte Helena 7/1/05 Administrative Officials David L. Senn, Executive Director Tammy Rau, Deputy Executive Director Dan Gaughan, Accounting/Fiscal Manager For additional information concerning the Montana Teachers’ Retirement System, contact David L. Senn, Executive Director, at: 1500 Sixth Avenue PO Box 200139 Helena MT 59620-0139 e-mail: [email protected] Page ii Report Summary Teachers' Retirement This report documents the results of our financial-compliance audit System of the Teachers’ Retirement System for the two fiscal years ended June 30, 2004. This report contains one recommendation related to the actuarial soundness of the System. The previous audit report contained no recommendations. Teachers’ Retirement System personnel prepare the financial statements from the Statewide Accounting, Budgeting, and Human Resources System (SABHRS) with adjustment. Adjustments are made to more accurately present financial activity to the readers of the statements. We issued an unqualified opinion on the financial statements presented in this report which means the reader can rely on the financial information presented. The listing below serves as a means of summarizing the recommendation contained in the report, the System’s response thereto, and a reference to the supporting comments. We recommend the Teachers’ Retirement Board seek Recommendation #1 legislation for funding changes to ensure the Teachers’ Retirement System is funded on an actuarially sound basis, as required by Board policy and the Montana Constitution.................. 7 System Response: Concur. See page B-3. Page S-1 Introduction General We performed a financial-compliance audit of the Teachers’ Retirement System (System) for the two fiscal years ended June 30, 2004. The objectives of our audit were to: 1. Determine the System’s compliance with applicable laws and regulations. 2. Recommend improvements in the System’s management and internal controls. 3. Determine if the financial statements prepared by System personnel fairly present the fiduciary net assets of the Teachers’ Retirement System as of June 30, 2004 and 2003, and the changes in fiduciary net assets for the fiscal years then ended, in conformity with generally accepted accounting principles. The financial statements are prepared from the Statewide Accounting, Budgeting, and Human Resources System (SABHRS) with adjustment. Adjustments are made for errors in the accounting records and to accurately present financial activity to the readers of the statements. As such, a reader should not expect these financial statements to agree in all instances to the state’s primary accounting records. Our previous financial-compliance audit report of the Teachers’ Retirement System, covering the two fiscal years ended June 30, 2002, contained no recommendations. This report contains one recommendation to the Teachers’ Retirement Board. Other areas of concern deemed not to have a significant effect on the successful operations of the Teachers' Retirement System are not specifically included in the report, but have been discussed with management. In accordance with section 5-13-307, MCA, we analyzed the cost of implementing the recommendation contained in this report and determined it was not significant. Background The Teachers’ Retirement System, established by state law in 1937, had more than 18,200 active members and 1,600 vested inactive members not yet receiving benefits at June 30, 2004. Approximately Page 1 Introduction 9,900 retirees or their beneficiaries were receiving retirement, disability, or survivor benefits as of June 30, 2004. A six-member board, appointed by the Governor for five-year terms, governs the System. In addition to providing oversight to System personnel, the board’s responsibilities include: (cid:23) Establishing rules and regulations necessary for the proper administration and operation of the retirement system. (cid:23) Determining the eligibility of a person who is applying for membership in the System. (cid:23) Granting retirement, disability, and other benefits under the provisions of Title 19, chapter 20, MCA. (cid:23) Designating an actuary to provide consultation on the technical actuarial aspects of the retirement system. System personnel are responsible for the daily administration of the Teachers’ Retirement System. Except as noted below, all full-time members of the teaching profession are required by law to be members in the Teachers’ Retirement System. By law, an eligible employee of the Montana University System (MUS), hired after July 1, 1993, must become a member of an optional retirement plan, the Teachers' Insurance and Annuity Association - College Retirement Equities Fund (TIAA- CREF), unless the employee is already a member of the Teachers’ Retirement System or the Public Employees’ Retirement System. TIAA-CREF is administered by the Board of Regents of Higher Education. The 1999 Legislature passed legislation directing the Teachers’ Retirement Board to implement a Guaranteed Annual Benefit Adjustment (GABA) effective in January 2000. GABA provides retirees meeting certain requirements with a guaranteed 1.5 percent increase in retirement benefits on an annual basis. Page 2 Introduction The System is funded with contributions from active members, their employers, and earnings on the System's investments. Active members contribute 7.15 percent of their earned compensation, while employers contribute an amount equal to 7.47 percent of the earned compensation of each member employed. The MUS also contributes an amount equal to 4.04 percent of the salaries of TIAA-CREF participants. As of July 1, 2002, and as a result of the implementation of GABA, the state of Montana contributes from the General Fund 0.11 percent of the compensation for each member participating in the System. This contribution will continue until the amortization period of the unfunded liability is 10 years or less. The contributions are exempt from income tax to the employees until benefits are drawn against those contributions. The Montana Board of Investments invests the System's assets. Page 3