Prepared by the Metropolitan Transit Authority Of Harris County, Texas Divisions of Accounting and Treasury Services

Transcription

1 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Comprehensive Annual Financial Report December 31, 2013 and 2012 Prepared by the Metropolitan Transit Authority Of Harris County, Texas Divisions of Accounting and Treasury Services

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3 Table of Contents Page Number Introductory Section (Unaudited) 1 Transmittal Letter from the Chairperson of the Trustees 2 The Trustees and Their Responsibilities 4 Consultants and Money Managers 4 Organization 5 Certificate of Achievement for Excellence in Financial Reporting 6 Financial Section 7 Independent Auditors Report 8 Management s Discussion and Analysis (Unaudited) 10 Basic Financial Statements 13 Statements of Plan Net Position 14 Statements of Changes in Plan Net Position 15 Notes to the Basic Financial Statements 16 Required Supplemental Information (Unaudited) Schedule of Funding Progress 25 Schedule of Employer Contributions 25 Other Supplemental Information (Unaudited) Schedule of Investment and Administrative Services 26 Investment Section (Unaudited) 27 Overview of the Investment Policy 28 Current Money Managers 30 Investment values and results 32 Actuarial Section (Unaudited) 39 Actuary s letter 40 Actuarial Assumptions 44 Information about Participants 45 Financial Experience 48 Statistical Section (Unaudited) 55 Schedules of Payments to Participants 56 Schedule of Participants for 10 years 57 Statements of Changes in Plan Net Position for10 Years 58

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5 Introductory Section (Unaudited) This section provides a quick overview of the Transport Workers Union Pension Plan, Local 260, AFL-CIO Comprehensive Annual Financial Report and includes the transmittal letter from the Chairperson of the MTA/TWU Union Pension Board of Trustees, and information on performance, organizational structure, and responsibility for financial reporting. The prior year Certificate of Achievement for Excellence in Financial Reporting is also included. 1

6 METROPOLITAN TRANSIT AUTHORITY TRANSPORT WORKERS UNION PENSION PLAN LOCAL, 260, AFL-CIO 1900 Main St. Houston, TX July 25, 2014 Plan Participants, Trustees of the Transport Workers Union Pension Plan and Members and the Board of Directors of the Metropolitan Transit Authority of Harris County, Texas (METRO) I am pleased to present the Transport Workers Union Pension Plan, Local 260, AFL-CIO (Plan) Comprehensive Annual Financial Report (CAFR) for the year ended December 31, The Plan is a defined benefit, non-contributory plan which is for employees covered by the collective bargaining agreement. The CAFR has five sections and is one of the few reports which brings together the major financial and management elements of a pension plan. This Introductory Section discusses the overview of the CAFR, the Plan s performance as well as the MTA/TWU Union Pension Board of Trustees (Trustees) and METRO s (the Plan sponsor) responsibilities for managing the Plan and providing accurate, reliable financial information. The Trustees and METRO are dedicated to providing quality financial information and earned for two consecutive years the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officer Association. The five sections of the CAFR, listed below, provide you with information that will help in evaluating the Plan s performance and sustainability. These sections are: Introductory Financial Investment Actuarial Statistical Identifying Opportunities and Monitoring Performance of the Plan During the year the Trustees and financial advisor met at least quarterly to discuss investment opportunities and performance. Topics included general market conditions, money managers performance and new investment opportunities ranging from commodities to real estate. Like most pension plans, we continue to evaluate methods of improving investment returns while minimizing risk. Key to this process is the investment policy which established investment objectives, asset allocation percentages and individual responsibilities. As part of this process, the Committee reallocated $29 million from SSgA Russell 1000 Growth Index Fund and assigned $25 million to Brown Advisory Large Cap Growth, (a new money manager) and $4 million to Brandywine Global Fixed Income. Additional information on the Plan s investment policy is located in the notes to the basic financial statements and the Investment Section of this report. 2

7 Funding, Returns and Funded Status Funding for the Plan is provided by METRO and is based on independent actuarial calculations. This was a very good year for the Plan as METRO continued to fund the actuarial required contribution and the investment return was 16.33% (net of fees) or 1.53% below the Plan s current asset mix benchmark. While the current year investment returns are favorable, the approximate investment return for last 10 years is 6.3% or 1.7% below the investment policy and actuarial investment rate of 8.0% net of fees. Additional information on the Plan s investment performance is located in the Investment Section (Unaudited) of this report. Two key measurements in evaluating performance are the Plan s funded ratio and value of the unfunded actuarial accrued liabilities. These measurements indicate how successful the Plan has been in accumulating assets to pay retirees and their beneficiaries. The Plan s unfunded actuarial accrued liabilities (UAAL) decreased to $73.9 million from $85.7 million or 13.8% and the funded ratio increased from 67.9% to 73.6% or 5.7 % between 2013 and The decrease in the liabilities and increase in the funded ratio is primarily the result of investment gains from prior years now being recognized. Future changes The Governmental Accounting Standard Board issued Statement No. 67, Financial Reporting for Pension Plans which becomes effective for the Plan in 2014 and Statement No. 68, Accounting and Financial Reporting for Pension Plans which becomes effective in 2015 for the Plan s sponsor. These standards will require the use of the entry age actuarial cost method and establish additional requirements for investment (discount) rate, financial statement presentation and note disclosures. It is anticipated these changes will increase the Plan s unfunded actuarial accrued liability (net pension liability) while reducing its funded ratio. The Financial Reporting Entity and Responsibilities for Internal Controls The Plan is not a component unit of METRO or any other plans and the accompanying basic financial statements include all activities for which the Plan is financially accountable as defined by GASB No. 14, The Financial Reporting Entity and Statement No. 61, The Financial Reporting Entity: Omnibus. The responsibility for accuracy, reliability and fairness in the presentation of financial information and related disclosures rests with the Trustees and METRO. All disclosures that are necessary to enable the reader to gain an understanding of the Plan s financial activities have been included. The Trustees and METRO are also responsible for ensuring that an adequate internal control structure is in place for preparation of financial information, safeguarding of assets, effective and efficient use of resources and compliance with applicable laws and regulations Other Information and Acknowledgement Each section of the CAFR provides information that is useful in evaluating the Plan s performance. You will find Management s Discussion and Analysis located in the Financial Section starting on page 10 of the CAFR. McConnell & Jones LLP, Certified Public Accountants, audited the Plan s basic financial statements. The Plan s audited financial statements along with the actuarial report are sent each year to the state s Pension Review Board. The Trustees appreciate the work and dedication of all those who support the objectives of the Plan. Debbie Sechler Chairperson, Transport Workers Union Pension Plan, Local 260, AFL-CIO 3

8 The Trustees and Their Responsibilities METRO s President and Chief Executive Officer and the Transport Workers Union, Local 260, AFL-CIO each appoint two Trustees to oversee the administration of the Plan. These Trustees are fiduciaries (based on State of Texas law) and must act for the exclusive purpose of accumulating sufficient assets to pay retiree benefits as they come due. They follow the prudent person rule when authorizing expenses and implementing the investment policy. The Trustees are dedicated professionals and included the following as of January 23, 2014: Debbie Sechler, Chairperson Auturo Jackson John Bland Horace Marves Consultants and Money Managers The Trustees rely on many professionals with different skills to ensure the Plan is operating as intended and include: Consultants Gray and Company Milliman, Inc. Fulbright & Jaworski L.L.P. State Street Bank and Trust Co Activity Financial advisor Actuary Legal counsel Asset custodian and benefit payment services Money managers Market segment Direct investment Herndon Large Capital Value Domestic equity GW Capital's (U.S.) Small Cap Domestic equity Morgan Dempsey Capital Management Domestic equity LLC Small/Micro Cap Equity Brown Advisory LCG Domestic equity Mutual fund T. Rowe Price International equity Commingled funds GMO Global fixed income Brandywine Global Global fixed income State Street Bank and Trust Co. Russell 1000 Growth Index Fund State Street Bank and Trust Co. Russell 2000 Index Fund Additional information on investment and actuarial performance can be found in those sections of this report. 4

9 Organization Support Staff Provided by METRO Pension Trustees Plan Participants Financial Advisor Money Managers Consultants The organization listing provides an overview of all those involved in supporting the Plan. The Trustees are responsible for the operations of the Plan. They select the financial advisor, money managers, and consultants who report directly to the Trustees. Support staff is provided by Human Resources and the Finance Department of METRO. Plan participants are those who are eligible to participate in the Plan. The financial advisor is responsible for assisting in the development and implementation of an effective investment policy while monitoring the performance of the money managers and the overall markets where investments are made. Money managers are responsible for investing the Plan s assets. Consultants consist of several organizations which provide services including legal, actuarial, asset custodial, disbursing agent and independent auditing. 5

10 The responsibility for the accuracy, reliability and fairness of the presentation of financial information and related disclosures in the Comprehensive Annual Financial Report rests with the Committee and METRO. All disclosures that are necessary to enable the reader to gain an understanding of the Plan s financial activities have been included. The Committee and METRO are also responsible for ensuring that an adequate internal control structure is in place for preparation of financial information, safeguarding of assets, effective and efficient use of resources and compliance with applicable laws and regulations. The internal control structure has been designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes: (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of cost and benefits requires estimates and judgment by management. In addition, the Plan is required by state law to have independent certified public accountants perform annual financial audits. The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Transport Workers Union Pension Plan, Local 260, AFL CIO for its CAFR for the year ended December 31, This is the second year to receive this award and reflects the commitment to quality financial reporting. In order to receive this award you must publish an easily readable and efficiently organized CAFR report which satisfies both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year. We believe that our current CAFR will continue to meet the Certificate of Achievement Program's requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. 6

11 Financial Section 7

12 To Participants and Trustees Metropolitan Transit Authority Transport Workers Union Pension Plan Local 260, AFL-CIO: Report on the Plan s Financial Statements Independent Auditors Report We have audited the accompanying financial statements of the Metropolitan Transit Authority Transport Workers Union Pension Plan Local 260, AFL-CIO (Plan), which comprise of the Statements of Plan Net Position as of December 31, 2013 and 2012, and the related Statements of Changes in Net Plan Position for the years then ended, and the related notes to the Plan s basic financial statements (collectively, Plan s financial statements). Management s Responsibility for the Plan s Financial Statements The Plan s management is responsible for the preparation and fair presentation of the Plan s basic financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP); this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the Plan s basic financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on the Plan s basic financial statements based on our audits. We conducted our audits in accordance with the auditing standards generally accepted in the United States of America (GAAS). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the Plan s basic financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Plan s basic financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the Plan s basic financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Plan s preparation and fair presentation of the Plan s basic financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plan s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by the Plan s management, as well as evaluating the overall presentation of the Plan s basic financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 8

13 Opinion In our opinion, the Plan s basic financial statements referred to above present fairly, in all material respects, the financial status of the Plan as of December 31, 2013 and 2012, and changes therein for the years then ended, in accordance with GAAP. Other Matters Required Supplemental Information GAAP requires that the management s discussion and analysis, schedule of funding progress and schedule of employer contributions, as listed in the table of contents, be presented to supplement the Plan s basic financial statements. Such information, although not a part of the Plan s basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the Plan s basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplemental information in accordance with GAAS, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with the Plan s management s responses to our inquiries, the Plan s financial statements, and other knowledge we obtained during our audit of the Plan s basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audits were conducted for the purposes of forming an opinion on the Plan s basic financial statements. The introductory section, investment, actuarial and statistical sections, and schedule of investment and administrative services included under other supplemental information in the financial section, as listed in the table of contents, are presented for purposes of additional analysis and are not a required part of the Plan s basic financial statements. The schedule of investment and administrative services is the responsibility of the Plan s management and was derived from and relate directly to the underlying accounting and other records used to prepare the Plan s basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the Plan s basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the Plan s basic financial statements or to the Plan s basic financial statements themselves, and other additional procedures in accordance with GAAS. In our opinion, the schedule of investment and administrative services is fairly stated, in all material respects, in relation to the Plan s basic financial statements as a whole. The introductory, investment, actuarial and statistical sections have not been subjected to the auditing procedures applied in the audit of the Plan s basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Houston, Texas July 25,

14 Management s Discussion and Analysis (Unaudited) This discussion and analysis section provides an overview of the performance of the Plan and should be read in conjunction with the rest of the basic financial statements of the Plan. The Plan is a single employer, defined benefit plan with the goal of accumulating sufficient assets over time to pay retirement benefits and related operating cost. This goal is accomplished by receiving annual contributions from METRO, investment returns on the Plan s assets and achieving various actuarial assumptions. Employees do not contribute to the Plan and the Plan does not cover postemployment health care cost. The annual funding requirement and the funded status of the Plan are developed each year from an independent actuarial study. Contributions to the Plan are approved by METRO s Board of Director as part of METRO s annual operating budget. Adequate diversification in both markets and money managers continues to be an important part of the Plan s investment strategy. During the year, the Trustees reallocated $29 million from State Street Global Advisors Russell 1000 Index with $25 million being allocated to Brown Advisory Large Cap Growth (a new money manager) and $4 million (additional investment) to Brandywine Global Fixed Income. Additional information relating to the Plan s investment performance and individual money manager s contributions is located in the Investment Section (Unaudited) of this report. Financial Highlights The sustainability of a pension plan is reflected in its actuarially determined funding level which is primarily affected by contributions, earnings on investments, and performance against actuarial assumptions. Contributions to the Plan are made exclusively by METRO, the sponsoring entity, through monthly contributions that are based on an independent actuarial report. Contributions for the current and two previous years were: $ 14,335,058 $ 14,444,476 $ 13,493,652 Contributions stay relatively flat between 2013 and Increase in contributions in 2012 was primarily due to lower than expected investment returns and the aging of Plan participants. Earning on investments for 2013 was 16.33% net of fee, mostly from the Large cap composite 31.22%, Small cap composite 36%, and International equity composite of 14.34%, reduced by a negative return of (3.07)% for Global fixed income composite. As summarized by Gray & Company s Capital Market Review - Equities Rule, Bond Drool, equity ruled the markets for the year, led by the major developed markets, while the broad investment grade fixed income market suffered a loss for the year. The following three schedules reflect the net appreciation (loss) on investments, market values of investments and related changes for the current and two previous years as of January 1, 2013, 2012 and

15 Volatility remains high as reflected in the net appreciation (loss) on investments as follows: $ 30,987,053 $ 24,177,917 $ (1,312,402) Fair value of investments in thousands was: Domestic equity $ 115,848 $ 90,233 $ 78,446 International equity 30,537 26,707 22,511 Global fixed income 74,894 73,141 63,135 Total investments $ 221,279 $ 190,081 $ 164,092 Changes in fair value of investments in thousands were: Domestic equity $ 25,615 $ 11,787 $ (1,244) International equity 3,830 4,196 (3,191) Global fixed income 1,753 10,006 4,722 Total investments $ 31,198 $ 25,989 $ 287 Performance against actuarial assumptions is reflected in the Plan s funded ratio and balance of the unfunded actuarial accrued liabilities (UAAL). These two key indicators are used in evaluating the progress made in accumulating sufficient assets to pay retirement benefit. The funded ratio increased by 5.6 % and the UAAL decreased by $7.8 million or 9.6% between 2012 and These changes are primarily due to higher than expected actuarial returns on Plan s investments and offset by a small demographic loss. January 1 (000) Funded Ratio 73.6 % 67.9 % 68.0 % Changes 5.7 % (0.1)% (2.1)% January 1 (000) UAAL Balance $ 73,907 $ 85,698 $ 81,715 Changes (11,791) 3,983 9,661 Starting in 2014 the Plan is required to implement Governmental Accounting Standard No. 67, Financial Reporting for Pension Plans. In addition, in FY2015 METRO, the Plan s sponsor is required to implement Government Accounting Standards No. 68, Accounting and Financial Reporting for Pensions. Both standards require the use of the entry age actuarial cost method and establishes additional requirements for investment (discount) rate, financial statement presentation, and note disclosures. It is anticipated these change will reduce the Plan s funded ratio and increase the UAAL balance. The 11

16 condensed Statement of Changes in Plan Net Position and related changes for the current and last two years are presented below. They provide an overview of contributions, net investment income, benefit payments, administrative services and changes in the assets that are held for payments of benefits. Additions, deductions and nets asset held by the Trust for pension benefits for the last three years ended December 31, 2013, 2012 and 2011 were: Additions Employer contributions $ 14,335,058 $ 14,444,476 $ 13,493,652 Net investment income 31,800,936 25,389,184 (506,247) Total additions 46,135,994 39,833,660 12,987,405 Deductions Paid to Plan members and beneficiaries 14,886,564 13,474,692 12,432,267 Administrative services 218, , ,582 Total deductions 15,105,025 13,673,637 12,618,849 Change in net position 31,030,969 26,160, ,556 Net position restricted for pension benefits Beginning of the year 193,290, ,130, ,762,083 End of the year $ 224,321,631 $ 193,290,662 $ 167,130,639 Changes for the last three years ended December 31, 2013, 2012 and 2011 were: Additions Employer contributions $ (109,418) $ 950,824 $ 1,076,803 Net investment income 6,411,752 25,895,431 (24,153,872) Total additions 6,302,334 26,846,255 (23,077,069) Deductions Paid to Plan members and beneficiaries 1,411,872 1,042, ,178 Administrative services 19,516 12,363 (521,203) Total deductions 1,431,388 1,054, ,975 Change in net position 4,870,946 25,791,467 (23,370,044) Net position restricted for pension benefits Beginning of the year 26,160, ,556 23,738,600 End of the year $ 31,030,969 $ 26,160,023 $ 368,556 During 2013 net investment income improved due to general market conditions and payments to plan members and beneficiaries increased as more active employees elected to retire. Please review the remaining sections of this report for additional information. Contact information If you have questions about this report or need additional information please contact the Sr. Director of Accounting, Metropolitan Transit Authority of Harris County, Texas, P.O. Box Houston, Texas

17 Basic Financial Statements 13

18 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Statements of Plan Net Position December 31, 2013 and Assets Cash equivalents $ 3,187,094 $ 3,374,871 Investments, at fair value: Domestic Equity 115,848,217 90,232,922 Global-Fixed Income 74,893,408 73,141,314 International-Equity 30,536,999 26,706,753 Total investments 221,278, ,080,989 Interest and dividends receivable 99,277 77,724 Total assets 224,564, ,533,584 Liabilities and plan net position Accounts payable 225, ,582 Securities in transit 18,195 44,340 Total liabilities 243, ,922 Net position restricted for pension benefits 224,321, ,290,662 Total liabilities and Plan net position $ 224,564,995 $ 193,533,584 The accompanying notes are an integral part of the Plan s basic financial statements. 14

19 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Statements of Changes in Plan Net Position Years Ended December 31, 2013 and Additions Employer contributions $ 14,335,058 $ 14,444,476 Investment income Interest and dividends 1,618,017 1,899,115 Net appreciation (loss) on investments 30,987,053 24,177,917 Investment income 32,605,070 26,077,032 Less: investment expenses 804, ,848 Net investment income 31,800,936 25,389,184 Total additions 46,135,994 39,833,660 Deductions Paid to Plan members and beneficiaries 14,886,564 13,474,692 Administrative services 218, ,945 Total deductions 15,105,025 13,673,637 Change in net position 31,030,969 26,160,023 Net position restricted for pension benefits Beginning of the year 193,290, ,130,639 End of the year $ 224,321,631 $ 193,290,662 The accompanying notes are an integral part of the Plan s basic financial statements. 15

20 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL, CIO Notes to the Basic Financial Statements 1. Overview of the Plan Plan Description The Metropolitan Transit Authority (METRO) established the Transport Workers Union Pension Plan, Local 260, AFL-CIO (Plan) for the purpose of accumulating funds to pay retirement benefits and certain related administrative costs. The Plan is a single employer, non-contributory defined benefit pension plan which is for employees covered by the collective bargaining agreement. The Plan was closed to new members on October 1, Retirement benefits are established during periodic negotiations with the Transport Workers Union of America, AFL-CIO and Local 260 of the Transport Workers Union of America, AFL-CIO (Union). Contributions made to the Plan are based on an independent actuarial report which is completed each year. The Plan provides for monthly normal retirement benefits based on the participant s years of service but not less than $300 each month. The calculation for the monthly normal retirement benefit is based on the designated dollar amount times the number of credited years of service. The designated dollar amount used to determine the monthly normal retirement benefit is based on date of retirement and as allowed by the Union labor agreement. The most current monthly amounts paid for recent retirees are as follows: August 1, 2002 through July 31, 2003 $ 50 August 1, 2003 through July 31, August 1, 2004 through July 31, August 1, 2005 through July 31, August 1, 2006 through July 31, August 1, 2007 through January 31, February 1, 2009 through present 60 Participants can only choose monthly distributions. No lump sum payments are available unless the participant has a balance of $5,000 or less. Plan participants are 100% vested after five years of credited services. Participants become eligible to receive benefits at the earlier of 28 years of credit services or at age 60 with 5 years of credited services. The requirements for early retirement with reduced benefits are that an employee reaches age 55 with 25 years of credited service. In addition, the Plan provides for disability retirement benefits with the requirement being 5 years of credit services. Additional requirements include 5 years of vesting service for vested deferred retirement benefits and for pre-retirement spousal benefits. 16

21 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL, CIO Changes in plan participants between January 1, 2014 and January 1, 2013 were: Participants Change Active 2,241 2,274 (33) Terminated and vested (52) Receiving benefits Retired 1, Disabled (19) Beneficiaries Total receiving benefits 1,370 1, Total for all participants 4,166 4, Plan Administration METRO s Human Resources Department manages most of the day-to-day activities of the Plan including reviewing retirement options with participants, setting-up retiree payment information with State Street Bank and Trust (payment provider) and responding to retirement questions. The Finance Department provides support that includes administering the overall Plan, preparing financial reports and coordinating and reviewing actuarial information. Administrative services provided by METRO are not charged to the Plan and not reported as cost in the Statements of Changes in Plan Net Position. The asset custodian is State Street Bank (a federally regulated banking and trust company) which also provides administrative services that include issuing retiree s monthly checks, lump sum distributions, paying authorized operating expenses and complying with federal tax reporting requirements. The single mutual fund and four commingled funds maintain independent asset custodial accounts and are audited each year. While the Plan is not covered by the Employee Retirement Income Security Act of 1974, it must comply with Texas state law which covers many topics including: An actuarial valuation is performed by an entity that meets specific actuarial experience requirements and files with the State Pension Review Board at least every three years. The actuary should make recommendations to ensure the actuarial soundness of the plan. An independent actuarial audit is completed every five years with the related report filed with the State Pension Review Board 30 days after finalizing. Annual financial reports are to be audited by a certified public accountant and filed with the State Pension Review Board within 211 days after the close of the Plan s fiscal year. Investment managers (money managers) must acknowledge in writing their fiduciary responsibilities and must be registered under the Investment Advisors Act of Plan assets are to be kept in an asset custodian account, and money managers (other than banks) cannot be an asset custodian. Evaluation of investment services and performance should be done at frequent intervals. 17

22 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL, CIO Funding Policy METRO s Board of Directors authorizes the funding of the Plan as part of their annual budgeting processes. METRO funds each month 1/12 of the annual required contribution (ARC) as calculated each year by an independent actuary. The ARC includes both normal cost and an amount to amortize the unfunded actuarial accrued liability over a 30 year closed period. Plan participants do not contribute to the Plan. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying basic financial statements of the Plan are presented in accordance with generally accepted accounting principles established by the Governmental Accounting Standards Board (GASB), which designates accounting principles and financial reporting standards applicable to state and local governmental units. The accompanying basic financial statements of the Plan include solely the activities of the Plan relating to the accumulation and investment of net assets and related income necessary to provide the service, disability and death benefits required under the terms of the Plan document. Basis of Accounting The basis of accounting is the method by which revenues and expenses are recognized and reported in the Plan s basic financial statements. The accrual basis of accounting is used by the Plan. Under the accrual basis of accounting, revenues, which include contributions and investment income, are recognized when they are earned and collection is reasonably assured, and expenses are recognized when the liability is incurred. Employer s contributions are recognized when due with benefits payments recognized when paid to members as in accordance with the terms of the Plan. Cash Equivalents The Plan considers cash invested by the asset custodian in SSgA U.S. Government Short Term Investment Fund, a commingled fund, as cash equivalents. The balance as of December 31, 2013 was $3,187,094 of which $2,416,559 was available to domestic money managers for the purchase of securities and $770,535 was available to the Plan administrator for payment of retirement benefits and operating expenses. Cash equivalents are uninsured and uncollateralized. Investment Expenses Investment expenses incurred directly by the Plan include fees paid to the financial advisor, Gray and Company and the five money managers; Brandywine Global Opportunistic Fixed Income, Herndon Capital Management Large Capital Value, GW Capital Inc., Small Capital Equity (U.S.), Morgan Dempsey Capital Management LLC Small/Micro Capital Equity and Brown Advisory Large Capital Growth. Administrative Expenses Administrative expenses are financed directly by the Plan from contributions received from METRO which includes custodial account, disbursing agent, actuary, financial audit and legal services. Other support costs necessary for the Plan to effectively operate are provided directly by METRO and not reported in the Statements of Changes in Plan Net Position 18

23 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL, CIO Use of Estimates The preparation of the Plan s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities at the date of the Plan s financial statements, revenues and expenses during the reporting period, and disclosures. Accordingly, actual results could differ from these estimates. Investment Valuation and Income Recognition Investments in the one international equity mutual fund and four commingled funds are valued based on the net asset value per unit which approximates fair value of the underlying investments on specific valuation dates. If no sales are reported for that day, investments will be valued at the last published sales price or at fair value as determined in good faith by the fund money manager with assistance from their asset custodian or an independent valuation service. Investments made directly in domestic equities are reported at fair value based on a national security exchange. Unrealized gains and losses are presented as net appreciation (loss) in fair value of investments on the statements of changes in plan net position, along with gains and losses realized on sales of investments. Purchases and sales of investments are recorded on the trade date. Dividend income is recorded on the ex-dividend date. Interest and income from other investments are recorded as earned. 3. Actuarial Assumptions The Plan s ARC is based on actuarial assumptions prepared by an independent actuary based on information furnished by METRO. Actuarial assumptions are evaluated each January 1 st and include the use of the following key actuarial assumptions for the latest valuation date: Schedule of Key Actuarial Assumptions Valuation date January 1 st 2014 Cost method Projected unit credit Asset valuation method Five-year smoothed market value Investment rate of return 8.0% per annum Inflation rate 2.5% Cost of living/projected salary increase None Assumed annual retirement rate Varying percentage ranging from 5% to 100% for ages 60 through 70 years Mortality RP-2000 Combined Mortality with Projection Scale AA to year 2014 Disabled Mortality RP-2000 Disabled Mortality with Projection Scale AA to year 2014 Amortization of gains/losses Method Level dollars/re-established annually Remaining periods 29 years 19

24 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL, CIO Key actuarial assumptions are consistent with the prior year with the exception of a change in the mortality and disabled mortality tables that were updated to reflect projection to year Actuarial assumptions used in the annual actuarial evaluation process represent the best estimates of Plan management, as approved by the MTA/TWU Union Pension Board of Trustees (Trustees), and reflect a long-term perspective while reducing short-term volatility. Since the ARC to the Plan is based on these actuarial assumptions, including the cost method used by the actuary, any future changes to those assumptions or the cost method, as discussed in notes 7 & 8 to the Plan s financial statements, may affect the future funded status and funding progress of the Plan. 4. Funded Status and Funding Progress The Plan s funded status and funding progress for the last two years in thousands were: Actuarial Accrued Liabilities Unfunded Actuarial Accrued Liabilities UAAL as a Percentage of Covered Payroll Actuarial Valuation Date Actuarial Value of Assets (AAL) (UAAL) Funded Ratio Covered Payroll January 1, 2014 $ 206,052 $ 279,959 $ 73, % $ 106, % January 1, , ,359 85, % 91, % The Plan s Schedule of Funding Progress is presented under the required supplementary information on page 25. This schedule presents multiyear trend information about whether the actuarial value of the Plan s assets are increasing or decreasing over time relative to the AAL for future benefit payments. 5. Trustees and Investment Policy METRO s President and Chief Executive Officer and the Transport Workers Union, Local 260, AFL-CIO each appoint two Trustees to oversee the administration of the Plan. These Trustees are fiduciaries (based on State of Texas law) and must act for the exclusive purpose of accumulating sufficient assets to pay retiree benefits as they come due. The Committee s approved investment policy established objectives and guidelines for investing assets held by the Plan while minimizing investment risk. Additional information on the investment policy is located in the Investment Section (Unaudited) on page 27 and a complete copy can be obtained from METRO s Treasury Department. Included in this investment policy is the selection of money managers, investment strategies, concentration of investments, portfolio diversifications, credit and foreign currency risk. The Plan uses two passive and seven active managers in implementing its investment strategy. Domestic equity investments consist of two passive and four active managers. International investments consist of one mutual fund equity manager and two fixed income fund managers. All money managers have accepted, in writing, the responsibilities of a fiduciary. Direct investment in domestic equity is reflected by ownership of specific stocks. Ownership in the domestic equity 20

25 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL, CIO index funds, the international mutual equity fund and the two international fixed income funds are based on net asset value of the related fund. While the direct investment in domestic equity can be actively traded, the remaining investments must be redeemed with the issuing fund. Additional information on each money managers and their performance is located in the Investment Section (Unaudited) starting on page 27. Value of the Plan s investments as of December 31, 2013 and 2012 and related changes are as follow: Change Domestic equity $ 115,848,217 $ 90,232,922 $ 25,615,295 International equity 30,536,999 26,706,753 3,830,246 Global-fixed income 74,893,408 73,141,314 1,752,094 Total investments $ 221,278,624 $ 190,080,989 $ 31,197,635 The Plan s investment policy limits concentration risk and the Plan did not own any investments of a single issuer whose value exceeded 5 percent of the Plan s net position. Types of Investment Risks Investing has several types of risks some of which include; custodial, credit, investment concentration, foreign currency, and interest rate. The Plan manages these risks by using an independent asset custodian (State Street Bank and Trust Company), compliance monitoring by the financial advisor, reviewing independent financial audits of the mutual and commingled funds, and allocation of investment dollars among nine money managers who operate in separate markets and whose performance is measured using difference indexes. Asset Custodian State Street Bank and Trust Company is the Plan s asset custodian. Investments made by domestic money managers are held directly by the Plan s assets custodian. Investments made by the mutual fund (international equity) and commingled funds (Global fixed income and Domestic equity index funds) are held by their independent asset custodian with the value of the Plan s investment, based on net asset value, being reported to the Plan s asset custodian. In addition to independent asset custodian, the mutual and commingled funds issue independently audited annual financial reports and must comply with oversight rules issued by governmental agencies. Additional information for each money manager is located in the Investment Section (Unaudited) starting on page 27. Managing investment concentration, credit and foreign currency risk Domestic Equities The maximum weighting (at time of purchase) in any one company of the investment manager s portfolio holdings do not exceed 8% or 5% more than the index weight, whichever is greater. 21

26 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL, CIO International Equities The maximum weighting (at time of purchase) in any one company does not exceed 7%. Currency hedging, foreign exchange contracts and similar strategies are permitted as part of a defensive strategy to protect the portfolio assets and enhance returns. Global Fixed Income The fixed income portfolio may include both domestic and/or international fixed income securities. Unless authorized by the Plan in advance and in writing, the minimum quality rating of an investment is BBB-. For an issue that is not rated, the security must be of equivalent quality to a BBB- rating or above in the opinion of the investment manager, or the security must be a government bond or a bond of a supranational authority which does not have a recognized credit rating. The maximum holding (cost basis) in any one security does not exceed 5%, excluding AAA rated sovereign debt. To manage currency risk, no investment manager shall have exposure to any one currency exceeding 70% for the Euro, 50% for the Japanese Yen, 40% for British Sterling and 25% for others excluding the U.S. Dollar. Currency hedging, foreign exchange contracts and similar strategies are permitted as part of a defensive strategy to protect the portfolio assets and enhance returns. Interest Rate Risk A change in interest rate will affect the underlying value of fixed income investments. Generally, increases in interest rates will reduce the value of the portfolio while decreases in interest rates will add value to such investments. To manage this risk, the Plan s financial advisor monitors the duration (the weighted average of time until cash flows are received, measured in years) of each fixed income money manager s portfolio in relation to the appropriate indexes. Significant variances from the benchmark are discussed with the Trustees and the related money manager. GMO Emerging Country Debt Investment Fund PLC duration was 7.5 years and has a policy of managing the portfolio to within +/- 2 years of the duration benchmark used in JPMorgan Emerging Market Bond Index. Brandywine Global Opportunistic Fixed Income Fund duration was 5.95 years and has a policy of managing the portfolio to within +/- 1.5 years of the duration benchmark used in Barclays Global Aggregate Index. Additional credit risk disclosure The two international fixed income funds (included in Global Fixed Income) invest in developed and emerging markets sovereign debt. While the funds themselves have not been rated by any nationally recognized rating agency, most of their investments are rated as discussed above. 22

27 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL, CIO 6. Federal Income Tax The Plan received its latest favorable letter of determination dated July 6, 2012 from the Internal Revenue Service stating that the Plan qualifies as a tax-exempt plan and trust. The Plan s management believe the Plan is currently designed and being operated in compliance with the applicable requirements of the Internal Revenue Code. Accounting principles generally accepted in the United States of America require the Plan s management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The Plan s management has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2013 and 2012, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the Plan s financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. 7. Risks and Uncertainties Investments securities are exposed to various risks, as discussed in note 5 above, including market volatility. Significant changes in the value of investments can have a direct and material effect on the net asset value of the Plan and the amount of the unfunded actuarial accrued liabilities. The Trustees have taken steps to minimize these risks by maintaining a diversified investment portfolio and hiring professional money managers and other consultants. The actuary, as discussed in note 3 above, uses actuarial assumptions when calculating the Plan s funding requirements, the actuarial present value of accumulated plan benefits and other actuarial information. Due to uncertainties inherent in the estimation and assumptions process, it is at least reasonably possible that changes in these actuarial assumptions in the near term could be material to the Plan s financial statements 8. Recent Accounting Pronouncements In June 2012, the GASB issued Statement No. 67, Financial reporting for Pension Plans An amendment of GASB Statement No. 25. This Statement requires the use of the entry age actuarial cost method and a long-term investment return rate using a yield or index rate on tax-exempt 20- year, AA-or-higher rated municipal bonds when the plan has not accumulated sufficient assets to pay benefits or is not meeting its expected investment return. This Statement is effective for financial statements for fiscal years beginning after June 15, These requirements will increase the Plan s future unfunded actuarial accrued liabilities and reduce the Plan s funded ratio. In June 2012, GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions an Amendment of GASB Statement No. 27. This standard will be used by the Plan s sponsor to record and report pension information in their financial statement and must comply with similar provision as listed above. This Statement is effective for fiscal years beginning after June 15, 2014 and it is anticipated that these requirements will increase the Plan s future unfunded actuarial accrued liabilities and reduce the Plan s funded ratio reported by the Plan s sponsor on their Statement of Net Position. GASB also issued Statement No. 71 Pension Transition for Contributions Made Subsequent to the Measurement Date. This statement is to be applied simultaneously with Statement No

28 Notes to the 2013 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL, CIO 9. Comparative Information Certain amounts reported in the Plan s prior year financial statements under investments have been reclassified to conform to the current year s financial statement presentation. These changes in reclassification had no effect on the previously reported investment balance or the ending net position of the Plan as of December 31, Subsequent Events The Plan s management has evaluated subsequent events through July 25, 2014; the date the Plan s financial statements were available to be issued. No changes were made, or are necessary to be made, to the Plan s financial statements, as a result of this evaluation. 24

29 Required Supplemental Information (Unaudited) Schedule of funding progress of the Plan for the current and each of the previous seven years as of January 1 is presented below (US dollars in thousands): Actuarial Accrued Liabilities Unfunded Actuarial Accrued Liabilities UAAL as a Percentage of Covered Payroll Actuarial Valuation Date Actuarial Value of Assets (AAL) (UAAL) Funded Ratio Covered Payroll January 1, 2014 $ 206,052 $ 279,959 $ 73, % $ 106, % January 1, , ,359 85, % 91, % January 1, , ,553 81, % 94, % January 1, , ,018 72, % 93, % January 1, , ,091 64, % 88, % January 1, , ,685 73, % 85, % January 1, , ,595 32, % 84, % Two key measurements in evaluating performance are the unfunded actuarial accrued liabilities and the funded ratio. These measurements indicate how successful the Plan has been in accumulating assets to pay retirees and their beneficiaries. The Plan s unfunded actuarial accrued liabilities increased since 2008 by $41.2 million to $73.9 million or 126 percent while the Plan s funded ratio declined from 83.1% to 73.6% or 9.5 percent. This decline is primarily related to investment earning which is not achieving the actuarial investment return of 8%. Schedule of employer contributions to the Plan for the current and each of the previous seven years is presented below (US dollars in thousands): Equivalent Plan Year Annual Required Contribution Actual Contribution Percentage Contributed Investment Return Single Amortization Period December 31, 2013 $ 14,335 $ 14, % 8% 30 years December 31, ,444 14, % 8% 30 years December 31, ,494 13, % 8% 30 years December 31, ,417 12, % 8% 30 years December 31, ,186 12, % 8% 30 years December 31, ,827 8, % 8% 30 years December 31, ,527 16, % 8% 30 years 25

30 Other Supplemental Information (Unaudited) Schedule of Investment and Administrative Services for the Years Ended December 31, 2013 and 2012 Type Investment services Direct payments to money managers: Brandywine $ 266,147 $ 256,248 GMO (8,505) (6,492) Alliance Bernstein 7,025 74,530 Atlanta Capital ,902 State Street Global Advisor-R ,459 7,029 GW Capital 45,123 34,465 Morgan Dempsey 115,419 63,088 Herndon Capital Management 208,868 41,078 Brown Large Cap Growth 101,823 - Total of money managers 746, ,848 Financial advisor Gray and Company 57,750 63,000 Total investment services 804, ,848 Administrative services: Audit Services McConnell & Jones LLP 12,000 13,700 Legal counsel- Fulbright & Jaworski - 4,522 Custodian and disbursement agent State Street Bank and Trust 153, ,353 Actuary- Milliman 39,403 34,913 Retirement Horizons Inc. 12,500 - Other 900 3,457 Total administrative services 218, ,945 Total investment and administrative services $ 1,022,595 $ 886,793 Direct administrative support provided by METRO and money manager s fee associated with the international equity mutual fund and State Street index funds are not included in this schedule. 26

31 Investment Section (Unaudited) Information used to prepare this section of the CAFR came from the investment policy; the year-end performance report provided by Gray and Company and independently audited financial reports for the commingled and mutual fund money managers. 27

32 Overview of the Investment Policy General The Trustees responsibilities include establishing, implementing and updating an investment policy which provides the framework for making and monitoring investment performance. A copy of this policy can be obtained by contacting METRO s Treasury Department. Key points of the policy include: 1. Establish reasonable expectation, objective and guidelines for the investment of the assets in the Plan. 2. Create the framework for a well-diversified asset mix that can be expected to generate achievable long-term returns at a level of risk acceptable to the Plan, including: Describing an appropriate risk posture for the investments. Specifying broad target asset allocation ranges and constraints. Establishing investments guidelines regarding the selection of investments managers, permissible securities and diversification of assets. Specifying the criteria for evaluating and reporting on the performance of the Plan s investment managers. 3. Defines the responsibilities of the Trustees, financial advisor and money managers. 4. Encourage effective communication between all participants. Financial advisor To assist in implementing the investment policy the Trustees hired, during 2010, Gray and Company as their financial advisor. As the Plan s financial advisor, Gray and Company is responsible for assisting in updating and implementing the investment policy which includes monitoring compliance, reporting financial results and recommending investment strategies Investment objective The Trustees invest using a long-term view with the objective of achieving the actuarial rate of return of 8%, net of manager fees and administrative expenses. A period of five to seven years is used in measuring progress toward achieving this objective. The returns on the traditional asset classes within the Plan s investment pool (total domestic equity and total fixed income) should exceed the return on a composite of non-managed market indices weighted in proportion to the actual structure of the Plan s portfolio. Generally, the investment portfolio should benefit from active management. Marketability and investment values Investments are limited to those that are readily marketable with the exception of certain categories such as real estate, private equity, and certain alternative investments. No investment should be made in non-marketable securities without prior approval from the Trustees. Asset values are generally established based on national securities exchange with specific valuation approaches discussed within the description of active money managers portion of this section. 28

33 Diversification To ensure effective diversification, the Trustees allocate funds to various asset classes and money managers that invest in different markets using various investment strategies as discussed in the following pages. To achieve the investment objective, the Trustees can invest in markets based on the following percentages: Investment Policy Domestic equities 25-70% International equities 0-30% Private equities 0-10% Hedge funds 0-20% Real estate 0-15% Global fixed income 20-50% Short-term investments 0-20% The actual asset allocation as of December 31, 2013, in thousands, complied with the investment guidelines as reflected in the following graph reported in thousands. Short-term investments Cash equivalents $3,268 or 1.4% International equities consisting of one mutual fund $30,537 or 13.6% Global fixed income consisting of two commingled funds $74,894 or 33.4% Domestic equities consisting of four active managers and two SSgA index funds $115,848 or 51.6% 29

34 Current Money Managers In addition to asset allocation, money managers are essential in earning adequate investment returns. The Plan ended the year with nine money managers that are responsible for implementing the investment policy and related strategy by directly purchasing/selling investments. All money managers are required to accept the role of a fiduciary as defined by the Employee Retirement Income Security Act. To ensure a diversified investment portfolio, the Trustees select money managers that invest in different parts of the worldwide markets using different investment strategies. The Trustees and financial advisor follow a stringent money manager selection process some of which include: evaluating investment strategy and investment team continuity, reviewing performance history, performing on-site visits and conducting multiple interviews. Only upon completion of this process will the Trustees vote on the final selection of a money manager. During the year the Committee reallocated $29 million from State Street Global Advisors Russell 1000 Index with $25 million being assigned to Brown Advisory Large Cap Growth fund (a new money manager) and $4 million (additional investment) to Brandywine Global Fixed Income. The following information discusses the individual money manager and their investment approaches which include: market segment, investment style and how investments are valued. The discussion also includes information on administrative oversight such as independent audits, asset custodians and regulatory agencies. Domestic Equity Active Managers Herndon Capital Management Large Capital Value strategy reflects that true value is defined by companies that trade at a discount to what their fundamentals merit. This product is designed to give exposure to companies which are undervalued versus their peers but have demonstrated the ability to produce better than average market returns. The goal is to outperform the Russell 1000 Value Index over a market cycle with a strong focus on maintaining both quality and liquidity. A rigorous risk management process is applied during construction of the portfolio which is fully invested at all times. The asset custodian is State Street Bank and Trust with investments reported at fair value based on a national securities exchange. GW Capital Inc., Small Capital Equity strategy combines an emphasis on sector selection and fundamental security analysis. Sectors that are expected to perform well are identified by business and market cycle analysis. Key sector characteristics are improving financial trends and attractive valuation levels. Stocks are selected on the basis of valuation parameters and a qualitative judgment of management s commitment to enhancing shareholder value. Portfolios show both traditional value holdings (low price/earnings ratio and low price-to-book values), and growth oriented holdings with relatively higher valuations. Smaller companies and those with little institutional ownership or sponsorship are emphasized. The asset custodian is State Street Bank and Trust with investments reported at fair value based on a national securities exchange. Morgan Dempsey Capital Management LLC Small/Micro Capital Equity focuses on the area of the market where they can gain a significant advantage through bottom-up, fundamental research. Their ability to pursue micro-cap companies in addition to small-cap stocks provides them with opportunities that are off limits to many larger institutional strategies. The firm pursues companies 30

35 with strong competitive characteristics and equally strong balance sheets that are selling at a discount to estimated intrinsic value. As a buy-and-hold investor, the firm wants to be a long-term partner with great companies. While they consider themselves value investors, growth is one of the many factors they take into consideration when computing intrinsic value estimates. The asset custodian is State Street Bank and Trust with investments reported at fair value based on a national securities exchange. Brown Advisory s Large-Cap Growth philosophy is based on the belief that disciplined, bottom-up research leads to superior investment performance. Rigorous research is utilized to gain a better understanding of a company s growth potential and a framework for its present and future value. The firm takes a private company approach to public company investing seeking to own businesses that are industry leaders or hold a proprietary advantage over their competition. Overtime, concentrated portfolios of fundamentally strong businesses should generate returns in excess of the portfolio s index and the broad market, with an acceptable level of risk. Domestic Equity Passive Manager Index Fund (commingled funds) State Street Global Advisors (SSgA) Russell 1000 Growth Index Fund is managed using a passive (indexing) investment approach by which SSgA attempts to match, before expenses, the performance of the index. SSgA may employ a sampling or optimization technique to construct the portfolio. State Street Bank and Trust is the trustee, asset custodian and record keeper of the fund and has exclusive management and control of the Trust. The annual financial reports were audited by PricewaterhouseCoopers LLP with regulatory oversight provided by the U.S. Office of the Comptroller of the Currency. State Street Global Advisors Russell (SSgA) 2000 Index Fund is managed using a passive (indexing) investment approach by which SSgA attempts to match, before expenses, the performance of the index. SSgA may employ a sampling or optimization technique to construct the portfolio. State Street Bank and Trust is the trustee, asset custodian and record keeper of the fund and has exclusive management and control of the Trust. The annual financial reports were audited by PricewaterhouseCoopers LLP with regulatory oversight provided by the U.S. Office of the Comptroller of the Currency. Mutual Fund (international equity) T. Rowe Price Institutional International Growth Equity Fund (IGEF) is a diversified, open-end management investment company and is one of the portfolios established by T. Rowe Price Institutional International Funds, Inc. and registered under the Investment Company Act of The IGEF commenced operations on September 7, 1989 and seeks long-term growth of capital through investment primarily in common stocks of established non U.S. companies. Annual financial reports were audited by PricewaterhouseCoopers LLP with JP Morgan Chase London providing asset custodial services. Investments are valued at fair value as listed or regularly traded on a security exchange or in the case of over-the-counter (OTC) markets are valued at the last quoted sale price or, for certain markets, the official closing price at the time the valuations are made, except for OTC Bulletin board securities which are valued at the mean of the latest bid and asked prices. A security that is listed or traded on 31

36 more than one exchange is valued at the quotation on the exchange determined to be the primary market for the security. Listed securities not traded on a particular day are valued at the mean of the latest bid and asked prices for domestic securities and the last quoted sale price for international securities. This information is used when calculating the net asset value per unit. International Fixed Income (commingled funds) Brandywine Global Opportunistic Fixed Income Fund (BGOFIF) is a separate portfolio of the Brandywine Global Investment Management Trust (the Trust). The Trust was organized on May 1, 2006 by Brandywine Global Investment Management, LLC a corporation organized under the laws of the state of Delaware, and registered as an investment advisor under the Investment Advisor Act of The Trust was organized with the objective of achieving interest income and long-term capital appreciation by investing in U.S. fixed income and developing and emerging markets sovereign debt securities. Annual financial statements of BGOFIF were audited by Kreischer Miller with Bank of New York Mellon providing accounting and asset custodial services. Investments are valued at fair value based on market valuations provided by independent pricing services or based on values determined in good faith by the investment advisor. This information is used when calculating the net asset value per unit. GMO Emerging Country Debt Investment Fund PLC (GMO) is a limited liquidity investment company created under the laws of Ireland as a public limited company pursuant to the Companies Acts, 1963 to It was incorporated on May 20, 2003, under registration number The investment objective of GMO is to achieve higher total returns by investing at least 50% of its net assets in government securities of emerging countries, related derivatives securities and in GMO Alpha LIBOR (Offshore), L.P., Series (ALP-B), a Bermuda exempted limited partnership. The fund may also hold securities by investing in other collective investment schemes. Annual financial statements were audited by PricewaterhouseCoopers, Chartered Accountants and Statutory Audit Firm Dublin, Ireland. Asset custodial and administrative services are provided by State Street, Ireland. Investments are valued at fair value using official closing price or last sales price on the primary exchange or market where the investments are traded. The asset custodian will use State Street Fund Services (Ireland) Limited (the Administrator) to independently determine fair value when information is not available or the amount currently reported may not be representative of fair value. This information is used when calculating the net asset value per share. Proxy Voting The Investment Policy requires investment managers to vote in the best interest of the Plan and must be able to support all proxy voting in written format as requested. Investment values and results The following schedules were developed from information provided by the Plan s financial advisor, Gray and Company and represents information included in the quarterly reporting package provided 32

37 to the Trustees. Market values of investments by asset class, market segment and money manager with related changes between 2013 and 2012 were: Market Value (000) Investments Change Money managers Domestic equity SSgA 2000 Value-Index $ 9,901 $ 7,131 $ 2,770 SSgA 1000 Growth-Index 14,206 35,424 (21,218) GW Capital Small Capital Equity 8,605 6,573 2,032 Morgan Dempsey Small/Micro Capital Equity 13,090 9,485 3,605 Herndon Large Capital Value 41,925 31,620 10,305 Brown-Large Capital Growth 28,121-28,121 Total domestic equity 115,848 90,233 25,615 Mutual Fund - International equity T. Rowe Price Institutional International Growth Equity 30,537 26,707 3,830 Global-Fixed Income Brandywine- Global Opportunistic Fixed Income 62,685 60,859 1,826 GMO Emerging Country Debt 12,209 12,282 (73) Total Global-Fixed Income 74,894 73,141 1,753 Total net investments $ 221,279 $ 190,081 $ 31,198 Asset values and related portfolio percentages by asset class, market segment and money managers as of December 31, 2013 were: Percent of Investments Market Value Portfolio Money managers Domestic equity SSgA 2000 Value-Index $ 9, SSgA 1000 Growth-Index 14, GW Capital Small Capital Equity 8, Morgan Dempsey Small/Micro Capital Equity 13, Herndon Large Capital Value 41, Brown-Large Capital Growth 28, Total domestic equity 115, Mutual Fund - International equity T. Rowe Price International Growth Equity 30, Global-Fixed Income Brandywine- Global Opportunistic Fixed Income 62, GMO Emerging Country Debt 12, Total Global-Fixed Income 74, Total net investments $ 221,

38 Investment returns The investment returns are calculated using the geometric method. Geometric method calculates the average rate per period on an investment that is compounded over multiple periods. The total net return for the Plan during the last 10 years was approximately 6.37% which is below the investment policy and actuarial return goal of 8%. The following schedule reports the investment returns for the total Plan and by money managers with comparison to their related bench mark as of December 31, Periods Ended 12/31/2013 Last Quarter 1 Year 2 Years 3 Years 5 years Total Returns for the Plan (gross of fees) Total Returns for the Plan (net of fees) * Current Asset Mixed Benchmark Over (under) performance Returns by Money Manager (net of fees) SSgA Russell 1000 Growth Index The Russell 1000 Growth Index Over (under) performance (0.04) (0.08) SSgA Russell 2000 Value Index The Russell 2000 Index Over (under) performance (0.01) (.01) - Herndon Large Capital Value The Russell 1000 Value Over (under) performance 2.44 (1.68) Brown Advisory LCG The Russell 1000 Growth Over (under) performance (2.24) GW Capital Small Capital Equity The Russell 2000 Value Over (under) performance (1.06) (2.86) Morgan Dempsey Small Capital Equity The Russell 2000 Value Over (under) performance (.83) T.Rowe Price International Growth Equity The MSCI ACWI ex US (Net) Over (under) performance (0.36) (0.95) Brandywine Global Opportunistic Fixed Income (0.29) (3.56) The Barclays Global Aggregate (0.44) (2.60) Over (under) performance 0.15 (.96) GMO Emerging Country Debt 2.08 (.65) The JP Morgan Emerging Market Bond I 0.91 (6.58) Over (under) performance

39 The following schedule reflects returns by major asset class: Gross and Net Composite Returns by Market Last Quarter 1 Year 2 Years 3 Years 5 Years S Gross Returns Domestic Large Cap * Net of fees * Gross Returns - Domestic Small Cap Net of fees Gross Returns International Equity Composite Net of fees Gross Returns Global Fixed Income Composite 0.20 (2.72) Net of fees 0.11 (3.07) * Calculations were not available in the previous two schedules due to change in financial advisor. The percentage of the portfolio invested in the mutual and domestic funds are reflected in the previous schedule. The ten largest holding of total domestic equity included: Company Market Value % of Portfolio Apple Inc. $ 2,446, Western Digital Corp. 1,542, Google Inc. 1,388, TJX Cos Inc New 1,379, Visa Inc 1,328, Marathon Pete Corp 1,290, Aflac Inc 1,281, Express Scripts Hldg 1,223, Cboe Hldgs 1,215, United Therapeutics 1,206, A complete listing of all investments owned by the Plan can be obtained by contacting METRO s Treasury Department. 35

40 Schedule of Fees and Commissions for 2013 Broker Name Amount of Commission Number of Shares Commission Per share Avondale Partners LLC , Barclays Capital LE 8, , Bloomberg Trade Book LLC 65 4, BMO Capital Markets 233 7, BNY Convergex LJR 36 1, BOE Securities Inc/Broadcort CAP Corp , BTIG, LLC , Cabrera Capital Markets , Cantor Fitzgerald & Co / Castle Oak Sec 1,326 66, Capital Institutional Svcs Inc Equities 60 3, Cheevers & Co. Inc , Convergex Execution Solutions LLC 140 7, Credit Suisse Securities (USA) LLC , CSI US Institutional Desk , Davidson D.A. + Company Inc , Deutsche Bank Securities Inc 1,911 97, Direct Access Partners LLC , First Clearing, LLC Goldman Sachs + Co 1,866 81, Goldman Sachs International , Hanover Square Securities Group Inc Imperial Capital LLC Instinet 1, , Investment Technology Group Inc. 1,521 93, ISI Group Inc , J.P. Morgan Securities Inc. 2, , Jefferies + Company Inc. 89 8, JMP Securities , Johnson Rice + Co , Jones Trading Institutional Services LLC 3, , Keefe Bruyette + Woods Inc 1,808 65, Knight Clearing Services LLC , Knight Equity Markets LP 154 7, Leerink Swann And Company , Liquid Net Inc. 1,536 76, Loop Capital Markets , Macquarie Securities (USA) Inc , Merrill Lynch Pierce Fenner + Smith Inc. 1,851 92, Mischler Financial Group, Inc. - Equities 137 6, MKM Partners LLC 90 4,

41 Broker Name Amount of Commission Number of Shares Commission Per share Morgan Stanley Co. Incorporated 1,542 77, North South Capital LLC 109 5, Piper Jaffray 60 2, Raymond James And Associates Inc 116 3, RBC Capital Markets 126 6, Robert W. Baird Co. Incorporate , Sanford C. Bernstein Co. LLC 3, , Sterne Agee & Leach Inc Stifel Nicolaus + Co. Inc. 1,748 63, Sturdivant And Co., Inc. 86 4, Telsey Advisory Group LLC 1,145 38, Topeka Capital Markets Inc , UBS Securities LLC , Weeden + Co. 74 3, Wells Fargo Securities, LLC , William Blair & Company L.L.C 1,381 46, Williams Capital Group LP , Total $ 48,397 2,245,

42 38

43 Actuarial Section (Unaudited) Information presented in this section is from Appendix A and B of the independent actuarial report, prepared by Milliman, with the most recent valuation occurring January 1, A complete copy of the report can be obtained by contacting METRO s Treasury Department. Actuarial assumptions and results are reviewed for reasonableness by members of the Trustees and METRO each year during discussions with the actuary. Ultimately, the Trustees and METRO are responsible for selecting the actuarial assumptions used to calculate annual funding requirements, asset values and the balance of the unfunded actuarial accrued liability. State law requires the actuary s report along with the audited annual financial report be filed each year with the Pension Review Board. In addition, the actuarial assumptions must be independently audited by a different actuary every five years and their report reviewed by the Trustees, Plan s sponsored, original actuary and filed with the State s Pension Review Board. Starting in 2014 the Plan will implement Governmental Accounting Standard Board Statement No. 67 Financial Reporting for Pension Plans. This standard will require the use of the entry age actuarial cost method and establishes additional requirements for investment (discount) rate, financial statement presentation and note disclosures. It is anticipated these changes will increase the Plan s unfunded actuarial accrued liability while reducing its funded ratio. 39

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