Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Comprehensive Annual Financial Report

Transcription

1 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Comprehensive Annual Financial Report December 31, 2011 and 2010 Harris County, Texas Prepared by the Metropolitan Transit Authority of Harris County, Texas Division of Accounting

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3 Table of Contents Introduction Letter from the Chairperson of the Committee 1 The Committee s Responsibilities and its Members 3 Consultants and Money Managers 3 Organization 4 Comprehensive Financial Section Independent Auditors Report 8 Management's Discussion and Analysis 9 Basic Financial Statements Statements of Plan Net Assets 13 Statements of Changes in Plan Net Assets 14 Notes to the Basic Financial Statements 15 Required Supplemental Information Schedule of Funding Progress 23 Schedule of Employer Contributions 23 Schedule of Actuarial Assumptions 24 Investment Section (Unaudited) Description of Money Managers 27 Value of Assets Managed by Money Managers 29 Value of Assets Managed by Money Managers and Related Percentages 30 Ten Largest Holding Excluding the Mutual and Commingled Funds 30 Approximate Investment Returns for the Plan and by Money 31 Managers during the last 3 Years Schedule of Administrative Expenses 32 Actuarial Section (Unaudited) Actuary s letter 36 Overview of the Plan 39 Actuarial (Gain)/Loss for Prior Year 40 Schedule of Funding Progress 41 Schedule of Contributions 42 Schedule of Active Members by Age and Service Years 43 Statistical Section (Unaudited) Schedule of Average Benefit Payments 45 Schedule of Participants for the last 10 years 46 Statements of Changes in Plan Net Assets for the last 10 Years 47

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5 Introduction Section

6 METROPOLITAN TRANSIT AUTHORITY UNION PENSION PLAN LOCAL Main St. Houston, TX July 31, 2012 Plan participants 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 ending December 31, This report format is significantly different from prior years as we moved from a basic to a comprehensive presentation of financial information. The new format significantly expands discussions relating to how the Plan operates and includes more information on investments, statistical and actuarial activities. This report will be submitted to the Government Finance Officers Association for evaluation to determine if it qualifies for a Certificate of Achievement for Excellence in Financial Reporting. In order to be awarded this certificate, the Plan must publish an easily readable and efficiently organized CAFR which must satisfy both generally accepted accounting principles and applicable legal requirements. Accounting System and Internal Controls The Plan is not a component unit and the accompanying financial statements include all activities for which the Plan is financially accountable as defined by Governmental Accounting Standard No. 14 The Financial Reporting Entity. The responsibility for accuracy, reliability and fairness in the presentation of financial information and related disclosures rests with the committee. All disclosures that are necessary to enable the reader to gain an understanding of the Plan s financial activities have been included. The committee is 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 that (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. Financial Information The CAFR includes the Comprehensive Financial Section where the independent auditors report, Management s Discussion and Analysis, Basic Financial Statements and Required Supplementary Information are located. The CAFR also contains unaudited information on investment, actuarial and statistical activities. These additional three sections are useful when analyzing the Plan s performance on a long-term perspective. 1

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8 The Committee s Responsibilities and its Members METRO s President and Chief Executive Officer and the Transport Workers Union, Local 260, AFL-CIO each appoint two committee members to oversee the administration of the Plan. These committee members are fiduciaries (based on state 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. Members of the committee are dedicated professionals who are not compensated for their work and include: Appointed by METRO Susan Bailey, CPA, Chairperson Art Smiley, CPA, Vice-Chairperson Appointed by Transport Workers Union, Local 260 AFL-CIO John Bland David Gollinger * * Replaced by Mr. Horace Marves during July 2012 Consultants and Money Managers The committee relies on many professionals with different skills to ensure the Plan is operating as intended and includes: Consultants Gray and Company Milliman 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 Alliance Bernstein Domestic equity Atlanta Capital Domestic equity Mutual fund T. Rowe Price International equity Commingled funds GMO Fixed income Brandywine Fixed income State Street Bank and Trust Co Domestic equity index fund 3

9 Organization METRO s Support Staff Pension Committee Plan Participants Financial Advisor Money Managers Consultants This organization chart provides an overview of all those involved in supporting the Plan. The Pension Committee consists of four members who are responsible for overseeing operations of the Plan. They hire the Financial Advisor, Money Managers and Consultants who report directly to the Pension Committee. METRO s Support Staff is provided by Human Resources and the Finance Department. Plan Participants are those who are eligible to participate in the Plan. The Financial Advisor assists in the development and implementation of an effective investment policy and monitoring the performance of the Money Managers and the overall market. Money Managers are responsible for direct management of the Plan s assets. Consultants consist of several organizations which provide services including legal, actuarial, asset custodial, disbursing agent and auditing. 4

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11 Comprehensive Financial Section 6

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14 Management s Discussion and Analysis This discussion and analysis section provides an overview of the performance of the Transport Workers Union Pension Plan, Local 260, AFL-CIO and should be read in conjunction with the rest of the CAFR. The Plan is a single employer defined benefit plan which is for employees that are covered under the collective bargaining agreement. The goal of the Plan is to accumulate sufficient assets over time to pay for retirement benefits and operating cost. This objective is accomplished by receiving annual contributions from METRO and investment returns on the Plan s assets. Employees do not contribute to the Plan. Health care cost for retires are not included in this Plan. The annual funding requirement and funded status of the Plan are developed each year from an independent actuarial study. The Plan s committee members work with the financial advisor to select investment opportunities, hire money managers and review investment performance. To achieve asset diversification, the committee allocates the Plan s assets to six separate money managers with different investment strategies who generally invest in separate market segments. Identifying investment opportunities and selecting money managers are critical in ensuring consistent and adequate investment returns. The knowledge and advice of the financial advisor is essential in helping the committee select the best investment strategy. Additional information relating to the Plan s performance and individual money manager s contributions are located in the Investment Section of this report. Financial Highlights No changes were made to the investment strategy or Plan benefits for retirees during the year. Employer s contributions during 2011, 2010 and 2009 exceeded the benefit payments and administrative expenses which increased the value of Plan s assets by: (000) Employer contributions $ 13,494 $ 12,417 $ 12,186 Less Benefit payments and distributions 12,432 11,618 10,558 Administrative expenses Increase in Plan s assets from contributions $ 183 $ 91 $ 1,077 Investments The Plan s investments for the last three years consisted of: (000) Investments, at fair value: Plan administration money market $ 1,785 $ 1,453 $ 2,829 Domestic equities 60,840 61,249 53,515 Mutual fund 22,511 25,702 20,484 Commingled Funds 82,382 77,937 66,204 Total investments $ 167,518 $ 166,341 $ 143,032 9

15 Changes in investments for the last years were: (000) Investments, at fair value: Plan administration money market $ 332 $ (1,376) $2,381 Domestic equities (409) 7,734 11,618 Mutual fund (3,191) 5,218 6,933 Commingled Funds 4,445 11,733 12,696 Total investments $ 1,177 $ 23,309 $ 33,628 The increase in investments for the last three years relates to improvements in the markets from the significant decline experienced in The unfunded actuarial accrued liabilities (UAAL) balances and changes for the last three years were: January 1 (000) Balance $ 81,715 $ 72,054 $ 64,701 Changes 9,661 7,353 (8,702) The increase in the UAAL for January 1, 2012 and 2011 resulted from lower than expected returns on investments and some minor demographic experience which was different from the assumptions. The decrease in UAAL for January 1, 2010 occurred mainly due to the significant recovery from the 2008 market decline. The Plan continues to use the 8% investment return established in 1998 for determining the annual funding requirements and the balance of the unfunded actuarial accrued liability. The Plan s actuary and financial advisor believe the investment return rate of 8% remains achievable even though the plan has earned approximately 4% during the last 10 years. The committee will continue to monitor this rate to determine if any adjustments are necessary. This lower than expected investment return combined with increases in benefits from previous years are the primary reason the current unfunded actuarial accrued liability balance is $81.7 million. To reduce this balance, additional contributions from the Plan s sponsor, investment returns that exceed 8% or a combination of both will be required. The Plan sponsor has contributed at least the annual required contribution since 2003 and the Plan has a funding ratio of 68.0% as of December 31, The Statement of Changes in Plan Net Assets and Changes in the Statement of Changes in Plan Net Assets for the last three years provide an overview of how the plan is funded; the cost of benefits/expenses and the affect changes in the market value of the Plan s assets has on the value of the net assets held for pension benefits. Generally the employer s required contributions (calculated by actuary) has increased since 2009 primarily due to lower than expected investment returns, funding of earlier benefit increases and changes in actuarial assumptions. 10

16 Statements of Changes in Plan Net Assets For Three Years Ended December 31, 2011, 2010 and 2009 (000) Additions Employer contributions $ 13,494 $ 12,417 $ 12,186 Net investment income ,648 32,545 Total additions 13,680 36,065 44,731 Deductions Benefit payments and distributions 12,432 11,618 10,558 Administrative expenses Total deductions 13,311 12,326 11,109 Net Increase (decrease) ,739 33,622 Net assets held by trust for pension benefits Beginning of the year 166, , ,401 End of the year $ 167,131 $ 166,762 $ 143,023 Changes for the Last Three Years Ending December 31, 2011, 2010 and 2009 (000) Additions Employer contributions $ 1,077 $ 231 $ 3,360 Net investment income (23,462) (8,897) 83,675 Total additions (22,385) (8,666) 87,035 Deductions Benefit payments and distributions 814 1,060 1,155 Administrative expenses (119) Total deductions 985 1,217 1,036 Net Increase (decrease) (23,370) (9,883) 85,999 Net assets held by trust for pension benefits Beginning of the year 23,739 33,622 (52,377) End of the year $ 369 $ 23,739 $ 33,622 Contact information If you have questions about this report or need additional information please contact the Metropolitan Transit Authority of Harris County, Texas, Accounting Division P.O. Box 61429, Houston, Texas

17 Basic Financial Statements 12

18 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Statements of Plan Net Assets December 31, 2011 and Assets Investments, at fair value: Plan administration money market $ 1,784,734 $ 1,453,185 Domestic equities 60,840,221 61,249,095 Mutual fund 22,510,603 25,701,693 Commingled Funds 82,382,337 77,936,850 Total investments 167,517, ,340,823 Receivables, interest and dividends 75,313 60,693 Securities in transit 276, ,690 Total assets 167,869, ,203,206 Liabilities and plan net assets Accounts payables 152,102 58,946 Securities in transit 587, ,177 Total liabilities 739, ,123 Plan net assets held in trust for pension benefits 167,130, ,762,083 Total liabilities and plan net assets $ 167,869,757 $ 167,203,206 The accompanying notes are an integral part of the financial statements. 13

19 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Statements of Changes in Plan Net Assets Years Ended December 31, 2011 and Additions Employer contributions $ 13,493,652 $ 12,416,849 Investment income Interest and dividends 1,498,725 1,246,229 Net appreciation (loss) on investments (1,312,402) 22,401,396 Net investment income 186,323 23,647,625 Total additions 13,679,975 36,064,474 Deductions Benefit payments and distributions 12,432,267 11,618,089 Administrative expenses 879, ,785 Total deductions 13,311,419 12,325,874 Net Increase (decrease) 368,556 23,738,600 Net assets held by trust for pension benefits Beginning of the year 166,762, ,023,483 End of the year $ 167,130,639 $ 166,762,083 The accompanying notes are an integral part of the financial statements. 14

20 Notes to the 2011 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL CIO 1. 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. This Plan is a single employer, non-contributory defined benefit pension plan which is for employees covered by the collective bargaining agreement. 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. 15

21 Notes to the 2011 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, 2012 and January 1, 2011 were: Participants Change Active 2,504 2,552 (48) Participants who moved to another status Terminated and vested Receiving benefits Retired Disabled Beneficiaries Total receiving benefits 1,159 1, Total participants 4,254 4, Plan Administration METRO s Human Resource 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 all retirement questions. METRO s Finance Department provides support which includes confirmation of benefit calculations, 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 Statement of Revenues, Expenses and Changes in Net Assets. The asset custodian is State Street Bank and Trust (SSB&T) which is a federally regulated banking and trust company. In addition, SSB&T provides administrative services which 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 three 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, it must comply with state law which covers many topics some of which include: An actuarial evaluation, with report, 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. Independent actuarial audit is completed every five years with the related report filed with the State Pension Review Board 30 days after finalizing. Each annual financial report is 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

22 Notes to the 2011 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL CIO 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. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying basic financial statements are presented in accordance with the Governmental Accounting Standards Board (GASB), which designates accounting principles and financial reporting standards applicable to state and local governments. Only the activities of the Plan are included in this report. Basis of Accounting The Plan uses accrual accounting when recognizing revenues and expenses in the financial statements. Under this approach, revenues are recognized when they are earned and collection is reasonably assured. Expenses are recognized when a liability is incurred with the exception of benefit payments which are not recorded as an expense until paid in accordance with the terms of the Plan. Cash Equivalents Cash held by the asset custodian for use by the Plan s administrator to pay operating expenses and retiree benefits or for use by money managers to re-invest is temporarily placed into money market accounts and has been reported as part of investments in the Statements of Net Plan Assets. Administrative Expenses Certain administrative expenses are paid directly by the Plan which include money managers, financial advisor, custodial account, actuary, audit and legal services. Other support costs necessary for the Plan to effectively operate are provided directly by METRO and are not reported in the Statements of Changes in Plan Net Assets. Estimates Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from these estimates. Investment Valuation and Income Recognition Investments are reported at fair value. Securities listed or traded on a national exchange are stated at fair value as established by quoted market prices. The fair value of the mutual fund is the net asset value as of the financial statement date. The fair value of participant units owned by the Plan in commingled trusts is based on the quoted redemption value on the last business day of the Plan s years. Purchase and sales of securities are recorded on a trade date basis. Interest income is recorded 17

23 Notes to the 2011 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL CIO on an accrual basis. Realized and unrealized gains and losses are reported as net appreciation (loss) on investments in the Statements of Changes in Plan Net Assets. Reclassifications Certain reclassifications have been made to the 2010 financial statements to conform to the 2011 financial statement presentation. These reclassifications had no effect on changes in net assets available for benefits. 3. Contributions Contributions to the Plan are based on actuarial valuations prepared by an independent actuary from data furnished by METRO. Funding requirements are determined utilizing the projected unit credit actuarial cost method. Actuarial gains and losses are amortized using the level dollars which is reestablished annually and amortized over 30 years. METRO has a policy of funding the annual required contribution to the Plan. 4. Investments Investment policy The committee invests using a long-term view with the objective of achieving the actuarial rate of return of 8% over time. A five to seven year period is appropriate in measuring progress toward achieving this objective. The returns (net of manager fees and other related fees and expenses) 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. To achieve this objective the committee can invest in markets based on the following percentages. 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% Investments The Plan uses one passive and five active managers in implementing the investment strategy. Domestic equity investments consist of one passive (Russell 2000 index) and two active managers. International investments consist of one mutual fund equity manager and two fixed income fund managers. Direct investment in domestic equity is reflected by ownership of specific stocks. Ownership in the domestic equity index fund, the international mutual equity fund and the two international fixed 18

24 Notes to the 2011 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL CIO income funds are based on the shares or unit price of the related fund. While the direct investment in domestic stock can be actively traded, the remaining investments must be redeemed with the issuing fund. Types of Investment Risks Investing has several types of risks some of which include custodial, credit, interest rates, foreign currency and investment concentration. The Plan manages these risks by using an independent asset custodian (State Street Bank and Trust Company) and allocating investments among six money managers who operate in separate markets. The index manager and the three international managers maintain separate asset custodial accounts and issue independently audited annual financial statements. All money managers have accepted the responsibilities of a fiduciary. The Plan s investment policy also covers these investment risks with compliance monitoring performed by the financial advisor. A complete copy of the investment policy can be obtained from the Finance Department of the Metropolitan Transit Authority. Some of these guidelines as it relates to the current investments and managing risk are listed below: Domestic The maximum weighting (at time of purchase) in any one company of the Investment Manager s portfolio holdings should not exceed 8% or 5% more than the index weight whichever is greater. International The maximum weighting (at time of purchase) in any one company should 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 should not exceed 5% excluding AAA rated sovereign debt. To manage currency risk, no Investment Manager should 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. 19

25 Notes to the 2011 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL CIO Additional credit risk disclosure The two international fixed income (Global Fixed Income) funds 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. Value of the Plan s assets as of December 31, 2011 and 2010 and related changes were: Change Assets Investments, at fair value: Plan administration money market $ 1,784,734 $ 1,453,185 $ 331,549 Domestic equities 60,840,221 61,249,095 (408,874) Mutual fund 22,510,603 25,701,693 (3,191,090) Commingled Funds 82,382,337 77,936,850 4,445,487 Total investments $ 167,517,895 $ 166,340,823 $ 1,177, Federal Income Taxes The Plan obtained its latest determination letter on October 30, 2003 in which the Internal Revenue Service stated that the Plan (as designed) was in compliance with the applicable requirements of the Internal Revenue Code. The Plan continues to operate within the scope of this determination letter and management believes the Plan will continue to retain its tax-exempt status. 6. Funded Status, Funding Progress and Significant Actuarial Assumptions Funded status and funding progress of the Plan as of January 1, 2012 in thousands were: Unfunded Actuarial Accrued Liabilities UAAL as a Percentage of Covered Payroll Actuarial Value of Assets Actuarial Accrued Liabilities (AAL) (UAAL) Funded Ratio Covered Payroll $ 173,838 $ 255,553 $ 81, % $ 94, % A schedule of funding progress is presented in the required supplementary information section following the notes to the financial statements. This schedule presents multiyear trend information about whether the actuarial value of the Plan s assets are increasing or decreasing overtime relative to the AALs for future benefit payments. 7. Risks and Uncertainties Investments securities are exposed to various risks, as discussed in note 4, 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 committee has taken steps to minimize this risk by maintaining a diversified investment portfolio and hiring professional money managers and other consultants. 20

26 Notes to the 2011 Financial Statements for the Metropolitan Transit Authority Transport Workers Union Pension Plan and Trust Local 260, AFL CIO Actuarial assumptions such as interest rates, inflation rates, and employee demographics, are used by the actuary when calculating 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 estimates and assumptions in the near term would be material to the financial statements. 8. Change in Accounting and Reporting Standard The Governmental Accounting Standards Board recently issued Statement No. 67, Financial Reporting for Pension Plans. This standard becomes effective for periods beginning after June 15, 2013 and 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. It is anticipated these changes will increase the unfunded actuarial accrued liabilities and the contribution requirements from the Plan s sponsor. These amounts (which may be material) will be calculated by the actuary when the standard is implemented during

27 Required Supplemental Information (Unaudited) 22

28 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Required Supplemental Information (Unaudited) Schedule of funded status and funding progress, in thousands, of the Plan as of January 1, 2012 was: Actuarial Accrued Liabilities Unfunded Actuarial Accrued Liabilities UAAL as a Percentage of Covered Payroll Calendar Year Actuarial Value of Assets (AAL) (UAAL) Funded Ratio Covered Payroll January 1, 2012 $ 173,838 $ 255,553 $ 81, % $ 94, % January 1, , ,018 72, % 93, % January 1, , ,091 64, % 88, % January 1, , ,685 73, % 85, % January 1, , ,595 32, % 84, % January 1, , ,140 32, % 81, % Schedule of employer contributions, in thousands, during the last 6 years were: Equivalent Calendar Year Annual Required Contribution Actual Contribution Percentage Contributed Investment Return Single Amortization Period December 31, 2011 $ 13,494 $ 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 December 31, ,403 17, % 8% 30 years 23

29 The information presented in the preceding schedules was determined as part of the actuarial valuations at the dates indicated. Information used in the January 1, 2012 actuarial valuations was: Schedule of Actuarial Assumptions Valuation date Cost method Asset valuation method Investment rate of return Funding policy Cost of living adjustments Projected salary increase Assumed annual retirement rate Mortality Disabled Mortality Amortization of gains/losses Method Period Open to new members January 1 st of each year Projected unit credit Five-year smoothed market value 8.0% per annum Meeting the ARC requirements None None Varying percentage ranging From 5% to 100% for ages less than 60 Through 70 RP-2000 Combined Mortality with Projection Scale AA to year 2012 RP-2000 Disabled Mortality with Projection Scale AA to year 2012 Level dollars/re-established annually 30 years Yes See accompanying independent auditors report as it relates to this section. 24

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31 Investment Section (Unaudited) 26

32 Description of Money Managers The committee hires independent money managers to directly manage and invest the Plan s assets in accordance with the investment policy. 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 committee selects money managers that invest in different parts of the world market. The committee and financial advisor follow a stringent money manager selection process some of which include: evaluating investment strategy, investment team continuity, reviewing performance history, performing on-site visits and conducting multiple interviews. Only upon completion of this process will the committee vote on the final selection of a money manager. The Plan had six money managers as of December 31, The following information discusses the individual money managers which include: market segment, investment style, how investments are valued, independent audits, and the use of asset custodians. Domestic Equity Active Managers Alliance Bernstein US diversified, Large Capital Value is a separately managed account which uses a value-based and price driven investment strategy that relies on a bottom-up stock selection as the primary driver of returns. Alliance Bernstein buys and sells large capital stocks which are generally included in the Russell 1000 value index with the objective of outperforming this index over time. The asset custodian is State Street Bank and Trust and investments are reported at fair value based on a national securities exchange. Atlanta Capital High Quality Growth Plus is a separately managed account which invests in companies with a demonstrated history of consistent earnings growth whose equities are selling at attractive prices. Atlanta Capital buys and sells large capital stocks which are generally in the Russell 1000 Growth index with the objective of outperforming this index over time. Active analysis of upside potential to downside risk drives buy-and-sell decisions. Research is bottom-up, emphasizing business fundamentals. The asset custodian is State Street Bank and Trust and investments are reported at fair value based on a national securities exchange. Domestic Equity Passive Manager Index Fund (commingled fund) State Street Bank and Trust Company SSgA Russell 2000 Index Securities Lending Fund was formed by State Street Bank under the State Street Bank and Trust Company Investment Funds for Tax Exempt Retirement Plans Declaration of Trust. The objective of the fund is to approximate as closely as practical, before expenses, the performance of the Russell 2000 index over the long-term. State Street Global Advisors (SSgA), a division of State Street Bank, is the fund s Investment Manager. 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. 27

33 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 is registered under the Investment Company Act of The IGEF commenced operations on September 7, 1989 and seeks long-term growth of capital through investments primarily in common stocks of established non U.S. companies. Annual financial reports were audited by PricewaterhouseCoopers 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 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 Commingled Funds Fixed Income 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 BNY 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 County 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 objectives of GMO is to achieve higher total returns by investing in at least 50% of the net assets in government securities of emerging countries in Asia, Latin America, the Middle East, Eastern Europe, Africa, 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. 28

34 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. Value of Assets Managed by Money Managers Investments are valued at fair value as listed on their principal exchange. If no sales are reported for that day, investments will be valued at the last published sales price, the mean between the last posted bid and asked price or at fair value as determined in good faith by the Trustee. This information is used when calculating the net asset value per share. The value of assets by money managers as of December 31, 2011 and 2010 and related changes were: Investment Value (000) Change Plan administration money market $ 1,785 $ 1,453 $ 332 Money managers Domestic equity Alliance Bernstein US Diversified Value Large Cap 29,619 29, Atlanta Capital High Quality Growth Plus Large Cap Growth 31,221 32,247 (1,026) Total domestic equity 60,840 61,249 (409) Mutual Fund - International equity T. Rowe Price Institutional International Growth Equity 22,511 25,702 (3,191) Commingled Funds Brandywine- Global Opportunistic Fixed Income 53,348 49,268 4,080 GMO Emerging Country Debt 9,787 9, State Street Global Advisors Russell 2000 index 19,247 19,524 (277) Total commingled funds 82,382 77,937 4,445 Total net investments $ 167,518 $166,341 $ 1,177 29

35 The value of assets by money managers, in thousands, as of December 31, 2011 and related percentages were: Amounts Investments Percentages Plan administration money market $ 1, Money managers Domestic equity Alliance Bernstein US Diversified Value Large Cap 29, Atlanta Capital High Quality Growth Plus Large Cap Growth 31, Total domestic equity 60, Mutual Fund - International equity T. Rowe Price Institutional International Growth Equity 22, Commingled Funds Brandywine- Global Opportunistic Fixed Income 53, GMO Emerging Country Debt 9, State Street Global Advisors Russell 2000 index 19, Total commingled funds 82, Total net investments $ 167, Ten largest holding excluding the mutual and commingled funds were: Company Market Value % of Portfolio Exxon Mobil $ 1,840, Apple Inc 1,769, General Electric 1,391, Qualcomm Inc 1,357, Monsanto Co 1,280, Gilead Sciences Inc 1,300, Wells Fargo & Co 1,152, Coca Cola Co 1,148, National-Oil Well Inc 1,017, Pfizer Inc. 965,

36 Approximate Investment Returns for the Plan and by Money Managers During the Last Three Years The total Plan outperformed the current asset mixed benchmark in 2009 and 2010 and slightly underperformed during The performance of the Plan and contributions by individual money managers are reflected in the following schedule. Approximate Returns Total Return (gross of fees) Current Asset Mixed Benchmark Over (under) performance (0.23) Returns by Money Manager Alliance Bernstein US Diversified Value Large Cap (0.50) The Russell 1000 Value Over (under) performance (0.89) (1.78) 0.61 Atlanta Capital High Quality Growth Plus Large Cap Growth (3.42) The Russell 1000 Growth Over (under) performance (6.05) (2.86) (3.18) T. Rowe Price Institutional International Growth Equity (13.07) (0.30) The MSCI ACWI ex (Net) (13.71) (2.06) Over (under) performance Brandywine Global Opportunistic Fixed Income The Barclays Global Aggregate Over (under) performance GMO Emerging County Debt The JP Morgan Emerging Market Bond I Over (under) performance (1.50) State Street Global Advisors Russell 2000 index (4.19) The Russell 2000 index (4.17) Over (under) performance (0.02) This performance schedule was calculated by the financial advisor. Total return for the Plan is reported gross of fees while individual money managers performance are reported net of fees. A complete listing of all investments owned by the Plan can be obtained by contacting METRO s Division of Accounting. 31

37 Total administrative expenses reported in this schedule do not include support provided by METRO or money managers fees associated with T. Rowe Price Institutional International Growth Equity mutual fund and State Street Global Advisors Russell 2000 index. Schedule of Administrative Expenses For the Year Ended December 31, 2011 Type Amount Actuarial $ 32,526 Audit 13,700 Legal counsel 500 Consulting 78,750 Money managers 613,821 Fund custodian 140,908 Other (1,053) Total administrative expense $ 879,152 32

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39 Actuarial Section Information Provided by the Actuary (Unaudited) 34

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44 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Overview of the Plan Actuarial Valuation For Plan Year Beginning Participants Data January 1, 2012 January 1, 2011 Number of participants Active 2,504 2,552 Terminated vested Retired Disabled Beneficiaries Total participants 4,254 4,200 Assets Market Value $167,130,346 $166,762,025 Investment yield in prior years 0.1% 16.6% Actuarial Value $173,837,727 $168,963,695 Investment yield in prior years 2.8% 4.0% Actuarial present value Present value of benefits $ 303,473,469 $ 289,639,255 Actuarial value of assets 173,837, ,963,695 Unfunded present value of benefits 129,635, ,675,560 Actuarial accrued liabilities 255,552, ,018,115 Actuarial value of assets 173,837, ,963,695 Unfunded actuarial accrued liabilities 81,715,182 72,054,420 Cost and contributions Normal cost 6,653,635 6,567,815 Past service contribution 6,720,880 5,926, years level dollar amortization Interest on contribution 1,069, ,530 Annual required contribution $ 14,444,476 $ 13,493,650 39

45 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Actuarial (Gain)/Loss for Prior Year The actuarial (gain)/loss for the prior year is the difference between the expected and actual unfunded actuarial accrued liability as of the beginning of the current plan year and is determined as follows. 1. Unfunded actuarial accrued liability as of January 1, 2011 $ 72,054, Normal cost as of January 1, ,567, Interest on (1) and (2) to end of the plan year 6,289, Subtotal 84,912, Employer contributions for the plan year 13,493, Interest on (5) to the end of the plan year 533, Subtotal 14,027, Changes in actuarial accrued liabilities a. Plan amendments - b. Changes in actuarial assumptions - c. Changes in cost method - d. Total - 9. Expected unfunded actuarial accrued liability as of January 1, ,884, Actual unfunded actuarial accrued liability as of January 1, ,715, Actuarial loss for the prior year plan $ 10,830,618 40

46 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Schedule of Funding Progress (000) 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, 2012 $ 173,838 $ 255,553 $ 81, % $ 94, % January 1, , ,018 72, % 93, % January 1, , ,091 64, % 88, % January 1, , ,685 73, % 85, % January 1, , ,595 32, % 84, % January 1, , ,140 32, % 81, % January 1, , ,424 42, % 82, % January 1, , ,044 41, % 87, % January 1, , ,147 33, % 87, % January 1, , ,565 29, % 84, % January 1, , ,012 22, % 81, % January 1, ,549 94,382 18, % 78, % January 1, ,213 85,739 20, % 78, % January 1, ,904 70,065 15, % 68, % January 1, ,671 63,992 18, % 69, % January 1, ,528 59,629 22, % 68, % January 1, ,595 48,038 15, % 67, % January 1, ,895 44,101 16, % 61, % Analysis of the dollar amounts of actuarial value of assets, actuarial accrued liability and unfunded actuarial accrued liability in isolation can be misleading. Expressing the actuarial value of assets as a percentage of the actuarial accrued liability provides one indication of the Plan s funding status on a going-concern basis. Analysis of this percentage over time indicates whether the Plan is becoming financially stronger or weaker. Generally, the greater the percentage the stronger is the Plan. Trends in unfunded actuarial accrued liability and covered payroll are both affected by inflation. Expressing the unfunded actuarial accrued liability as a percentage of covered payroll approximately adjusts for the effects of inflation and aids analysis of the Plan s progress made in accumulating sufficient assets to pay benefits when due. Generally, the smaller the percentage the stronger is the Plan. Selection of the investment return rate and actuarial cost method will significantly affect the value of the actuarial accrued liabilities. 41

47 Metropolitan Transit Authority Transport Workers Union Pension Plan, Local 260, AFL-CIO Schedule of Contributions (000) Equivalent Calendar Year Annual Required Contribution Actual Contribution Percentage Contributed Investment Return Single Amortization Period December 31, 2011 $ 13,494 $ 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 December 31, ,403 17, % 8% 30 years December 31, ,959 18, % 8% 30 years December 31, ,420 8, % 8% 30 years December 31, ,979 6, % 8% 30 years December 31, ,488 5, % 8% 30 years December 31, ,969 4, % 8% 30 years December 31, ,538 5, % 8% 30 years December 31, ,706 4, % 8% 30 years December 31, ,134 5, % 7% 30 years December 31, ,752 4, % 7% 30 years December 31, ,288 3, % 7% 30 years December 31, ,200 3, % 7% 30 years 42