RETIREMENT PLAN FOR NJ TRANSIT MERCER EMPLOYEES FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 30, 2014 AND 2013

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1 RETIREMENT PLAN FOR NJ TRANSIT MERCER EMPLOYEES FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 30, 2014 AND 2013 SUPPLEMENTAL SCHEDULE AND REPORT OF INDEPENDENT AUDITORS

2 RETIREMENT PLAN FOR NJ TRANSIT MERCER EMPLOYEES Financial Statements and Supplemental Schedule as of and for the Years Ended June 30, 2014 and 2013 TABLE OF CONTENTS PAGE REPORT OF INDEPENDENT AUDITORS MANAGEMENT S DISCUSSION AND ANALYSIS FINANCIAL STATEMENTS: Statements of Net Position... 7 Statements of Changes in Net Position... 8 Notes to Financial Statements REQUIRED SUPPLEMENTARY INFORMATION

3 Ernst & Young LLP 99 Wood Avenue South Metropark P.O. Box 751 Iselin, NJ Tel: Fax: ey.com Report of Independent Auditors Retirement Plan Committee Retirement Plan for NJ Transit Mercer Employees We have audited the accompanying financial statements of the Retirement Plan for NJ Transit Mercer Employees (the Plan), which comprise the statements of net position as of June 30, 2014 and 2013, and the related statements of changes in plan net position for the years then ended and the related notes to the financial statements. Management s Responsibility for the Financial Statements The Plan s management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 the accounting policies used and the reasonableness significant accounting estimates made by management, as well as, evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a reasonable basis for our audit opinion. 1 A member firm of Ernst & Young Global Limited

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the net position of the Plan as of June 30, 2014 and 2013, and the changes in its net position for the years then ended, in conformity with U.S. generally accepted accounting principles. Adoption of New Accounting Pronouncement As discussed in Note 2 to the financial statements, the Plan changed its method of financial reporting of pensions as a result of the adoption of Government Accounting Standards Board Statement No. 67, Financial Reporting for Pension Plans an Amendment of GASB Statement No. 25, effective July 1, Our opinion is not modified with respect to this matter. Required Supplementary Information Accounting principles generally accepted in the United States require that management s discussion and analysis and required supplementary information, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the 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 basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the 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. December 21, 2015 EY 2 A member firm of Ernst & Young Global Limited

5 RETIREMENT PLAN FOR NJ TRANSIT CORPORATION MERCER EMPLOYEES MANAGEMENT S DISCUSSION AND ANALYSIS The following overview of the financial activity of the Retirement Plan for the New Jersey Transit Mercer Employees (the Plan) is intended to provide the reader with the analysis of the Plan s overall financial position for the fiscal years ended June 30, 2014 and This Management s Discussion and Analysis should be read in conjunction with the basic financial statements of the Plan, which follow. Financial Highlights The Plan s net position was $28,330,787 as of June 30, This amount reflected an increase of $3,430,414 from the prior fiscal year. This change was the result of fiscal year 2014 operations. Additions for the year totaled $5,943,656 and were comprised of investment income of $3,884,760, employee and employer contributions of $2,055,027, and other receipts of $3,869. Deductions for the year totaled $2,513,242 and were comprised of benefit payments of $2,385,737 and actuarial and professional fees of $127, The Plan s net position was $24,900,373 as of June 30, This amount reflected an increase of $2,487,533 from the prior fiscal year. This change was the result of fiscal year 2013 operations. Additions for the year totaled $4,906,408 and were comprised of investment income of $2,767,419, employee and employer contributions of $2,135,966, and other receipts of $3,023. Deductions for the year totaled $2,418,875 and were comprised of benefit payments of $2,307,154 and actuarial and professional fees of $111,721. Overview of the Financial Statements This annual report consists of two financial statements: The Statements of Net Position and The Statements of Changes in Net Position. The financial statements were prepared using the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized in the period they are earned, and expenses are recorded in the year they are incurred, regardless of when cash is received or paid. The Statements of Net Position show the balances in all of the assets and liabilities of the Plan at the end of the fiscal year. The difference between assets and liabilities represents the Plan s net position available for benefits. Over time, increases or decreases in the Plan s net position may serve as a useful indicator of the Plan s financial position. The Statements of Changes in Net Position show the results of the financial operations for the year. The statements provide an explanation for the change in the Plan s net position since the prior year. The Notes to the financial statements are an integral part of the financial statements and provide additional information that is essential to a full understanding of the data provided in the financial statements. The required supplementary information presents information regarding the funding status of the pension trust and schedule of employer contributions. 3

6 Financial Analysis Summary of Net Position $ Increase/ (Decrease) % Increase/ (Decrease) Assets: Investments $29,968,464 $26,566,914 $3,401, Receivables 105,991 88,738 17, Total Assets 30,074,455 26,655,652 3,418, Liabilities: Payables 1,743,668 1,755,279 (11,611) (0.7) Total Liabilities 1,743,668 1,755,279 (11,611) (0.7) Net Position $28,330,787 $24,900,373 $3,430, Assets of the Plan consist primarily of investments, contributions due from employer and members, and accrued interest and dividends. Total assets were $30,074,455 as of June 30, 2014, an increase of $3,418,803 or 12.8 percent, from the prior fiscal year. This increase was due to an increase in fair value of investments of $3,401,550 or 12.8 percent and increased receivables of $17,253, or 19.4 percent. Liabilities of the Plan are comprised of accrued professional expenses and a net payable for the investments purchased. Between fiscal years 2014 and 2013, total liabilities decreased by $11,611, or 0.7 percent. This was primarily attributable to an increase in net payable for investments purchased. Net position increased by $3,430,414, or 13.8 percent Summary of Net Position $ Increase/ (Decrease) % Increase/ (Decrease) Assets: Investments $26,566,914 $23,664,380 $2,902, Receivables 88,738 85,605 3, Total Assets 26,655,652 23,749,985 2,905, Liabilities: Payables 1,755,279 1,337, , Total Liabilities 1,755,279 1,337, , Net Position $24,900,373 $22,412,840 $2,487, Assets of the Plan consist primarily of investments, contributions due from employer and members, and accrued interest and dividends. Total assets were $26,655,652 as of June 30, 2013, an increase of $2,905,667 or 12.2 percent, from the prior fiscal year. This increase was due to an increase in fair value of investments of $2,902,534 or 12.3 percent and increased receivables of $3,133, or 3.7 percent. Liabilities of the Plan are comprised of accrued professional expenses and a net payable for the investments purchased. Between fiscal years 2013 and 2012, total liabilities increased by $418,134, or 4

7 31.3 percent. This was primarily attributable to an increase in net payable for investments purchased. Net position increased by $2,487,533, or 11.1 percent Summary of Changes in Net Position $ Increase/ (Decrease) % Increase/ (Decrease) Additions: Investment income $3,884,760 $2,767,419 $1,117, Contributions 2,055,027 2,135,966 (80,939) (3.8) Other receipts 3,869 3, Total Additions 5,943,656 4,906,408 1,037, Deductions: Benefits 2,385,737 2,307,154 78, Professional fees 127, ,721 15, Total Deductions 2,513,242 2,418,875 94, Net Increase $3,430,414 $2,487,533 $942, Additions consist of investment earnings from investment activities, participants and employer s contributions, and other receipts. Investment income increased by $1,117,341, or 40.4 percent, as a result of the appreciation in investments from 2013 to This increase was primarily attributed to realized/unrealized gains on the investments of Janus Capital Management, LSV Asset Management, Paradigm Capital Management and Montage & Caldwell. Deductions include benefit payments and actuarial and professional fees. Total benefit payments to retirees and beneficiaries increased by $78,583, or 3.4 percent, due to an increase in the number of retirees receiving retirement benefits. Professional fees and other expenses also increased by $15,784, or 14.1 percent Summary of Changes in Net Position $ Increase/ (Decrease) % Increase/ (Decrease) Additions: Investment income $2,767,419 $178,058 $2,589,361 1,454.2 Contributions 2,135,966 2,049,661 86, Other receipts 3,023 2, Total Additions 4,906,408 2,229,757 2,676, Deductions: Benefits 2,307,154 1,921, , Professional fees 111, ,700 6, Total Deductions 2,418,875 2,027, , Net Increase $2,487,533 $202,389 $2,285,144 1,

8 Additions consist of investment earnings from investment activities, participants and employer s contributions, and other receipts. Investment income increased by $2,589,361, or 1,454.2 percent, as a result of the appreciation in investments from 2012 to This increase was primarily attributed to realized/unrealized gains on the investments of Janus Capital Management, LSV Asset Management, Paradigm Capital Management and Montage & Caldwell. The gains were partially offset by the losses on the investments of Rogge Global Partners and Western Asset Management. Deductions include benefit payments and actuarial and professional fees. Total benefit payments to retirees and beneficiaries increased by $385,486, or 20.1 percent, due to an increase in the number of retirees receiving retirement benefits. Professional fees and other expenses also increased by $6,021, or 5.7 percent. Overall Financial Condition of the Plan In FY 2014, the Plan adopted GASB Statement No. 67, Financial Reporting for Pension Plans- an amendment of GASB Statement No. 25 (GASB No. 67). The financial statements for 2013 and prior years were restated as a result of GASB No. 67. Based on the actuarial valuation dated June 30, 2014, the ratios of plan fiduciary net position as a percentage of the total pension liability was 66.76%, and the net pension liability as a percentage of covered payroll was %. Contacting the Plan s Financial Management The financial report is designed to provide our members, beneficiaries and other interested parties with a general overview of the Plan s finances and to show the Plan s accountability for the money it receives. If you have any questions about this report or need additional financial information, contact New Jersey Transit Corporation, Chief Financial Officer and Treasurer, One Penn Plaza East, Newark, New Jersey

9 RETIREMENT PLAN FOR NJ TRANSIT MERCER EMPLOYEES STATEMENTS OF NET POSITION As of June 30, * ASSETS Beneficial Interest in NJ TRANSIT s Master Trust at Fair Value $29,968,464 $26,566,914 Receivables: Dividend and Interest Income 105,698 88,497 Other ,991 88,738 Total Assets 30,074,455 26,655,652 LIABILITIES Accounts Payable and Accrued Expenses 1,743,668 1,755,279 Total Liabilities 1,743,668 1,755,279 NET POSITION Held in Trust for Pension Plan $28,330,787 $24,900,373 *Restated for GASB 67 implementation (see note 2b). See notes to financial statements. 7

10 RETIREMENT PLAN FOR NJ TRANSIT MERCER EMPLOYEES STATEMENTS OF CHANGES IN NET POSITION Years Ended June 30, * Additions: Investment Income: Net Increase in Fair Value of Investments $ 3,206,830 $ 2,146,331 Dividend and Interest Income 677, ,088 3,884,760 2,767,419 Contributions: Employer 1,833,299 1,924,402 Employees 221, ,564 2,055,027 2,135,966 Other receipts 3,869 3,023 Total Additions 5,943,656 4,906,408 Deductions: Benefits Paid to Participants 2,385,737 2,307,154 Actuarial and Professional Fees 127, ,721 Total Deductions 2,513,242 2,418,875 Increase in Net Position 3,430,414 2,487,533 Net Position Beginning of Year, as Previously Reported 26,145,681 23,739,765 Prior Period Adjustment - Cumulative effect of Accounting Change (1,245,308) (1,326,925) Net Position Beginning of Year, as adjusted for Accounting Change 24,900,373 22,412,840 Net Position - End of Year $ 28,330,787 $24,900,373 *Restated for GASB 67 implementation (see note 2b). See notes to financial statements. 8

11 RETIREMENT PLAN FOR NJ TRANSIT MERCER EMPLOYEES NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF PLAN The following brief description of the Retirement Plan for NJ TRANSIT Mercer Employees (the Plan) is provided for general information purposes only. More complete information concerning the Plan and its provisions is provided in the Plan document. a) General - The Plan is a defined benefit retirement plan. Because NJ TRANSIT Mercer, Inc. (the Company or NJ TRANSIT) is a government instrumentality, the Plan is exempt from many requirements of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA). Generally, all employees who are covered under collective bargaining agreements between the Company and the Amalgamated Transit Union Division No. 540 (NJ TRANSIT Mercer Employees) become participants of the Plan when they are first employed or re-employed after a break in service. The Plan is administered by the Retirement Committee, which consists of six persons three appointed by NJ TRANSIT and three appointed by the Amalgamated Transit Union Division No b) Contributions - The Company establishes contributions based on an actuarially determined rate recommended by an independent actuary. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by plan participants during the year, with an additional amount to finance any unfunded accrued liability. The Company is required to contribute the difference between the actuarially determined rate and the contribution rate of plan participants. Effective May 3, 2008, the Plan, as amended, became a contributory defined benefit retirement plan. All eligible employees as of May 3, 2008 contributed 2% of their gross salary to the Plan. In addition, any full-time employees hired, or any employees moving from part-time to full-time after that date, are required to contribute 4% of their gross salary. For the year ended June 30, 2014, the Company s average contribution rate was percent of annual payroll. c) Pension Benefits - The Plan provides retirement, death and disability benefits, with full vesting of the accrued benefits to a participant who terminates employment with 10 or more years of vesting service. A participant is credited with one year of vesting service for each calendar year in which he or she completes 1,000 hours of service or more. The standard form of pension payment to a retiring participant is a 50% actuarially equivalent reduced surviving spouse annuity unless the participant elects to have the benefits paid in some other form. For employees retiring on September 1, 2008 and thereafter, the retirement benefit rate increased to 2.125% from previous 2.0% for each year of service multiplied by the average of the highest three years earnings in the last ten years of service. Participants are always fully vested for their own contributions. d) Plan Participants - As of July 1, 2014, the most recent actuarial valuation date, the participants of Plan consisted of the following: Active participants 155 Inactive plan participants or beneficiaries currently receiving 114 benefits Inactive plan participants entitled to but not yet receiving benefits 13 Total 282 9

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Basis of Accounting The accompanying financial statements of the Plan have been prepared in accordance with the U.S. generally accepted accounting principles and adhere to the reporting requirements established by the Government Accounting Standards Board (GASB). The accrual basis of accounting is used for measuring financial position and changes in net position of the Plan. Under this method, contributions are recorded in the accounting period in which they are legally due from the employer or plan member, and deductions are recorded at the time the liabilities are due and payable in accordance with the terms of the Plan. b) Adoption of Accounting Pronouncements - In FY 2014, the Plan adopted GASB Statement No. 67, Financial Reporting for Pension Plans an amendment of GASB Statement No. 25 (GASB No. 67). The objective of this Statement is to improve financial reporting by state and local governmental pension plans. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision-useful information, supporting assessments of accountability and interperiod equity, and creating additional transparency. This Statement replaces the requirements of Statements No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and No. 50, Pension Disclosures, as they relate to pension plans that are administered through trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. The requirements of Statements 25 and 50 remain applicable to pension plans that are not administered through trusts covered by the scope of this Statement and to defined contribution plans that provide postemployment benefit other than pension. In connection with the implementation of GASB Statement No. 67, the Plan changed its accounting for certain contributions receivable from NJ TRANSIT. Previously, the Plan recognized contributions receivable from NJ TRANSIT that were considered due pursuant to formal commitments. GASB Statement No. 67 changed the criteria for recognizing receivables to limit recognition only to amounts that are due pursuance to legal requirements. This change in accounting resulted in the following adjustments: As Previously Reported Adjustment As Restated As of June 30, 2012 Net position $23,739,765 $(1,326,925) $22,412,840 As of June 30, 2013 Receivables: Employer Contributions 1,245,308 (1,245,308) - Net position 26,145,681 (1,245,308) 24,900,373 For the year ended June 30, 2013 Contributions: Employer 1,842,785 81,617 1,924,402 Increase in net position 2,405,916 81,617 2,487,533 c) Receivables - Receivables consist primarily of member and employer contributions and other amounts that are legally required to be due to the Plan. d) Valuation of Investments - The investments of the Plan, together with the investments of other plans of NJ TRANSIT, are pooled for investment purposes in a master trust under an agreement dated May 1, 1998 between the Bank of New York, Trustee, and NJ TRANSIT, the Plan Sponsor. Each participating plan shares in the income and changes in value (based on their respective asset value), and holds an undivided interest in the master trust investment fund. All master trust investments are stated at fair value based on quoted market price. Investments are recorded on a trade date basis. 10

13 e) Transfers Between Plans - NJ TRANSIT Bus Operations, Inc. maintains more than one funded pension plan for its employees. When employees are transferred from a position in a group covered by one Plan to a position in a group covered by another Plan, all contributions paid by the Company on behalf of the employees and related accumulated benefits are transferred to the other Plan. f) Income Taxes - The Plan is exempt from federal income taxes under the Internal Revenue Code, Section 115 and, accordingly, no provision is made for state and federal income taxes. g) Administrative Expenses - Substantially all administrative expenses related to the Plan are paid by NJ TRANSIT, exclusive of actuarial, trustee and investment manager s fees, which are paid by the Plan. 3. INVESTMENTS A summary statement of changes in the plan net assets for NJ TRANSIT s plans that are a part of Master Trust Account ( MTA ) at June 30, 2014 and 2013 follows: Additions: Investment income: Net(depreciation)/appreciation in fair value of investments $62,501,471 $43,168,545 Dividend and interest income 13,742,071 12,073,424 76,243,542 55,241,969 Contributions: Employer 22,638,398 38,247,559 Employees 2,345,777 2,412,943 24,984,175 40,660,502 Other receipts 75,402 58,881 Total additions 101,303,119 95,961,352 Deductions: Benefits paid to participants 40,513,171 37,227,469 Actuarial and professional fees 2,267,662 1,930,829 Total deductions 42,780,833 39,158,298 Increase in net position 58,522,286 56,803,054 Net Position Beginning of Year, as Previously Reported 544,763, ,903,964 Prior Period Adjustment - Cumulative effect of Accounting Change (36,566,365) (34,509,518) Net Position Beginning of Year, as adjusted for Accounting Change 508,197, ,394,446 Net Position - End of Year $566,719,786 $508,197,500 11

14 A summary of investments at fair value held by the MTA at June 30, 2014 and 2013 follows: MTA Cash Account $26,999,756 $37,944,619 Western Asset Management 152,196, ,078,022 Paradigm Capital Management 38,611,891 36,940,536 Montag & Caldwell 107,253,167 90,902,042 Janus Capital Management 42,127,056 35,762,749 First Eagle Overseas Fund CI I 16,440,436 12,355,115 LSV Asset Management 119,895, ,098,098 Credit Suisse 2,801, Rogge Global Partners 91,523,626 81,015,075 Total $597,849,503 $539,096,256 Deposit and Investment Risk Disclosures - The Master Trust invests in various equity and fixed income securities. The pension funds investments as of June 30, 2014 and 2013 were as follows: Short-term Investment $67,760,708 $68,678,066 Domestic Equities 257,473, ,133,006 Corporate Obligations 85,906,268 80,123,535 Federal Agency Obligations 3,683,529 3,106,918 United States Treasury Notes 12,101,559 20,507,048 United States Treasury Bonds 855, ,993 Assets and Mortgage Backed 75,587,840 66,159,252 Foreign Government Obligations 30,467,954 20,562,681 Mutual Funds and Other 64,013,441 49,337,757 Total $597,849,503 $539,096,256 Custodial Credit Risk For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the plans will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. As of June 30, 2013 and 2012, the investment securities are not exposed to custodial credit risk as they are held in segregated trust accounts in the names of the plans with the custodians. Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of Master Trust s fixed income securities. Generally, the value of the debt securities increases if interest rates fall and decreases if interest rates rise. The fixed income securities are limited to a term of 30 years, while the total portfolio s weighted average duration can generally not exceed 125% of the Barclays U.S. Aggregate Bond Index (formerly the Lehman Aggregate Corp. Bond Index). 12

15 The table below summarizes the MTA s exposure to interest rate risk by remaining term to maturity at June 30, 2014: Maturity in Years Fixed Income Investment Type Fair Value Less Than More Than 10 (In thousands) Short-term Investment $67,761 $67,761 $--- $--- $--- Corporate Obligations 85,906 4,079 38,778 34,462 8,587 Federal Agency Obligations 3, , United States Treasury Notes 12,101 1,499 5,425 5, United States Treasury Bonds Assets and Mortgage Backed 75, ,748 5,725 66,179 Foreign Government Obligations 30,469 6,835 1,160 14,357 8,117 TOTAL $276,363 $81,206 $48,770 $62,518 $83,869 Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The credit risk of debt instruments is evaluated by nationally recognized rating agencies such as Moody s, Standard & Poor s, and Fitch. There are no restrictions in the amount that can be invested in United States treasury securities. The Plans regulations require the total amount of the fixed income obligations that can be invested in bonds rated below BBB cannot exceed 25% of total value of bonds and 5% of total value of plan assets. The portfolio s weighted average credit quality should equal or exceed A. For securities exposed to credit risk in the fixed income portfolio, the following table discloses the aggregate fair value, by credit rating category at June 30, 2014: Fixed Income Investment Type (In thousands) Standard & Poor s Ratings Fair Value AAA AA A BBB BB B CCC CC Not Rated Short-term Investment $67,761 $--- $--- $--- $--- $--- $--- $--- $--- $67,761 Corporate Obligations 85,906 6,077 9,271 36,805 24,945 6,756 1, Federal Agency Obligations 3, , US Treasury Notes 12,101 12, US Treasury Bonds Assets and Mortgage Backed 75,588 9,380 55,446 2,223 1, ,580 3, ,867 Foreign Government Obligations 30,469 6,799 6,234 2,021 5, ,643 TOTAL $276,363 $35,212 $74,634 $41,049 $31,266 $7,408 $3,386 $3,743 $394 $79,271 Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of the MTA s investment in a single issuer. As of June 30, 2014 and 2013, no exposure of the concentration of credit risk existed since the Plans did not hold any investments in any one issuer that would represent five percent or more of total investments. Investments issued or explicitly guaranteed by the U.S. government and pooled investments are excluded from this regulation. 13

16 Foreign Currency Risk Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value of an investment or a deposit. The Master Trust fund invests in global markets. The market value of international equity invested in any one sector cannot exceed 30% and no more than 5% of the equity securities can be invested in the emerging market countries. In addition, the total amount of foreignissued bonds cannot exceed 45% of total value of bonds. There are no restrictions to limit the investment in foreign exchange contracts for the purpose of hedging the international portfolio. The Plans held forward contract receivables totaling $58,194,371 and payables totaling $58,240,501 (with net exposure of $46,130) as of June 30, 2014 and forward contract receivables totaling $27,230,216 and payables totaling $26,882,996 (with net exposure of $347,220) as of June 30, The Master Trust investments had the following currency exposure as of June 30, 2014 and 2013 (expressed in U.S. dollars): Currency (In thousands) Australian Dollar $238 $426 British Pound Sterling 4,252 3,210 Canadian Dollar 2,538 2,277 Czech Koruna Euro 33,967 22,705 Israeli Shekel --- 1,468 Japanese Yen 7,080 5,775 Malaysian Ringgit Mexican Peso 1,623 1,212 Norwegian Krone 2,935 2,807 New Zealand Dollar 1, Swedish Krona 354 1,115 Total $54,915 $42,437 The Plan s Interest in Master Trust Account At June 30, 2014 and 2013, the Mercer Employees Plan s beneficial interest in the MTA was approximately 5.0% & 4.9%, respectively of the total fair value of the master trust account. For the years ended June 30, 2014 and 2013, the Plan s investments (including investments bought, sold, as well as held during the year) appreciation/(depreciated) in fair value by $3,206,830 and $2,146,331, respectively, and are summarized as follows: Net Appreciation (Depreciation) in Fair Value During Year Fair Value at End of Year Year Ended June 30, 2014 MERCER Cash Account $--- $493,221 Western Asset Management 128,430 7,826,403 Paradigm Capital Management 220,540 1,845,722 Montag & Caldwell 863,153 5,590,487 Janus Capital Management 267,255 1,841,723 First Eagle Overseas Fund CI I 132,161 1,095,599 LSV Asset Management 1,422,552 6,268,383 Rogge Global Partners 172,739 5,006,926 Total $3,206,830 $29,968,464 14

17 Year Ended June 30, 2013 MERCER Cash Account $--- $189,241 Western Asset Management (81,165) 7,233,448 Paradigm Capital Management 294,293 1,861,487 Montag & Caldwell 596,153 4,796,421 Janus Capital Management 103,021 1,616,484 First Eagle Overseas Fund CI I 67, ,168 LSV Asset Management 1,394,777 5,663,043 Rogge Global Partners (228,302) 4,464,622 Total $2,146,331 $26,566,914 Investment Policy: The Plan s policy in regard to the allocation of invested assets is established and may be amended to pursue an investment strategy that reduces risk through the diversification of the portfolio across a broad selection of asset classes. The following was the Plan s adopted asset allocation policy as of June 30, 2014: Asset Class Target Allocation Domestic large cap equity 40.4% Domestic small cap equity 7.1% Foreign equity 10.0% Fixed income 40.5% Cash 2.0% Total 100.0% Rate of return: For the year ended June 30, 2014, the annual money-weighted rate of return on pension plan investments, net of pension plan investment expense, was percent. The moneyweighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested. 4. NET PENSION LIABILITY The components of the net pension liability at June 30, 2014 were as follows: Total Pension Liability $42,432,394 Plan fiduciary net position 28,330,787 Net pension Liability $14,101,607 Plan fiduciary net position as a percentage of the total pension liability 66.76% Actuarial assumptions: The total pension liability was determined by an actuarial valuation as of July 1, 2014, using the following actuarial assumptions, applied to all periods included in the measurement: Inflation 3.00% Salary increases 3.00% plus age and service based merit increases Investment rate of return 8.00%, Net of pension plan investment expense, including inflation Investment rate of return 8.00%, net of pension plan investment expense, including inflation 15

18 Mortality rates were based on the RP-2014 Blue Collar Mortality Tables for annuitants and nonannuitants. These tables are adjusted to future years using generational projection under one-half Scale MP-2014 to anticipate future mortality improvement. The total pension liability was determined using the level percent of salary Entry Age Normal Cost funding method. The actuarial assumptions are the same as the assumptions used in the July 1, 2014 funding actuarial valuation. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. Best estimates of arithmetic real rates of return for each major asset class included in the pension plan s target asset allocation as of June 30, 2014 are summarized in the following table: Long-Term Expected Real Asset Class Rate of Return Discount rate: The discount rate used to measure the total pension liability was 8.00%. The projection of cash flows used to determine the discount rate assumed that contributions will be made at the actuarially determined amount. Based on those assumptions, the pension plan's fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Sensitivity of the net pension liability to changes in the discount rate: The following presents the net pension liability, calculated using the discount rate of 8.00%, as well as what the net pension liability would be if it were calculated using a discount rate that is 1-percentage-point lower (7.00%) or 1-percentage-point higher (9.00%) than the current rate: 1% Decrease (7.00%) Current Discount (8.00%) 1% Increase (9.00%) Net Pension Liability $18,405,801 $14,101,607 $10,415, PLAN TERMINATION Domestic large cap equity 6.6% Domestic small cap equity 6.6% Foreign equity 7.1% Fixed income 2.2% Cash 0% In the event the Plan terminates, net assets of the Plan are to be allocated to (a) all participants currently or formerly employed by the Company or on pension as of the date of termination to the extent of contributions, less any payments made to them, (b) all participants who, prior to the threeyear period ending on the date of termination were receiving a pension or who would have been entitled to immediate pensions had their employment terminated prior to the beginning of this threeyear period, (c) all participants who have met the Plan s requirements for retirement or vested pension as of the date of termination and (d) all participants who were not receiving a pension and were not eligible under the Plan s requirements for retirement as of the date of termination and were 16

19 still employed by the Company. Funds shall be allocated towards a category only if there are assets of the Fund in excess of the total required to meet the obligations to each of the preceding categories. If there are assets allocated toward a category that are insufficient to fulfill the entire obligation of the category, each individual within the category shall be allocated assets in the same proportion that his or her obligation within the category bears to the total obligation for the category. The assets, if any, remaining after provision for all liabilities hereunder shall be returned to the Company. 6. RETIREMENT PLAN COMMITTEE AND TRUSTEE In accordance with the provisions of the Plan, the Plan is administered by the Retirement Plan Committee of the Company. The Retirement Plan Committee has entered into a Trust agreement with The Bank of New York (Trustee) that provides for the Trustee to invest and reinvest contributions received and to make payments and distributions to participating members and their beneficiaries based upon notification from the Retirement Plan Committee. In addition, the Trustee maintains custody of all Plan assets. 17

20 Required Supplementary Information 18

21 Retirement Plan for NJ Transit Corporation Mercer Employees Required Supplementary Information Schedules of Changes in Net Pension Liability - Last Ten Fiscal Years Schedule Total pension liability Service cost $902,624 Interest 3,067,161 Change of benefit terms - Differences between expected and actual experience - Changes of assumptions 1,315,972 Benefit payments, including refunds of employee contributions (2,385,737) Net change in total pension liability 2,900,020 Total pension liability beginning 39,532,374 Total pension liability ending (a) $42,432,394 Plan fiduciary net position Contributions employer $1,833,299 Contributions employee 221,728 Net investment income 3,884,760 Benefit payments, including refunds of employee contributions (2,385,737) Administrative expense (127,505) Other 3,869 Net change in plan fiduciary net position 3,430,414 Plan fiduciary net position beginning 24,900,373 Plan fiduciary net position ending (b) $28,330,787 Net pension liability ending (a) (b) $14,101,607 Plan fiduciary net position as a percentage of the total pension liability 66.76% Covered employee payroll $9,474,509 Net pension liability as percentage of covered employee payroll % 19

22 Retirement Plan for NJ Transit Corporation Mercer Employees Required Supplementary Information Schedule of Contributions Last Ten Fiscal Years Schedule 2 Year Ended June 30, Actuarially Determined Contributions Contributions in Relation to the Actuarially Determined Contributions Contribution Deficiency (Excess) Covered- Employee Payroll Contribution as a Percentage of Covered Employee Payroll 2014 $2,086,291 $1,833,299 $252,992 $9,474, % ,833,299 1,833,299-9,116, % ,924,403 1,924,403-9,012, % ,845,847 1,845,847-9,233, % ,605,916 2,606,797 (881) 9,610, % ,006,225 1,960,608 45,617 7,653, % ,031,927 2,031,927-7,477, % ,235,598 2,235,598-7,467, % ,557,779 2,557,779-8,924, % ,105,324 2,105,324-7,775, % Notes to Schedule Methods and assumptions used to determine the actuarially determined employer contributions are as follows: Valuation Date July 1, 2014 Actuarial Cost Method Amortization Method Projected Unit Credit Cost Method Level percentage of payroll, closed Remaining Amortization Period 15 Years as of July 1, 2014 Asset Valuation Method Investment Rate of Return 5-year smoothed market 8.0%, Net of pension plan investment expense, including inflation Inflation 3.00% Salary Increases 3.00% plus age and service based merit increases Mortality RP-2014 Blue Collar Mortality Tables for annuitants and non-annuitants. These tables are adjusted to future years using generational projection under one-half Scale MP-2014 to anticipate future mortality improvement. 20

23 Schedule 3 Retirement Plan for NJ Transit Corporation Mercer Employees Required Supplementary Information Schedule of Investment Returns Last Ten Fiscal Years 2014 Annual money-weighted rate of return, net of investment expense 10.53% 21