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TRS Board of Trustees Meeting
December 1 - 2, 2016
TEACHER RETIREMENT SYSTEM OF TEXAS MEETING BOARD OF TRUSTEES
AGENDA
December 1, 2016 – 9:00 a.m. December 2, 2016 – 8:30 a.m.
TRS East Building, 5th Floor, Boardroom
All or part of the December 1-2, 2016, meeting of the TRS Board of Trustees may be held by telephone or video conference call as authorized under Sections 551.130 and 551.127 of the Texas Government Code. The Board intends to have a quorum and the presiding officer of the meeting physically present at the following location, which will be open to the public during the open portions of the meeting: 1000 Red River, Austin, Texas 78701 in the TRS East Building, 5th Floor, Boardroom. NOTE: The Board may take up any item posted on the agenda during its meeting on Thursday, December 1, 2016, or during the meeting on the following day, December 2, 2016, beginning at the time and place specified on this agenda. The open portions of the December 1-2, 2016, Board meeting are being broadcast over the Internet. Access to the Internet broadcast of the Board meeting is provided at www.trs.texas.gov. 1. Call roll of Board members.
2. Consider the following administrative items – David Kelly: [Estimated time 9:00 – 9:15]
A. Approval of the proposed October 27, 2016, Board meeting minutes.
B. Excusing Board member absences from the October 27, 2016, Board meeting.
C. Setting, rescheduling, or canceling future Board meetings.
3. Provide opportunity for public comment – David Kelly. [Estimated time 9:15 – 9:30]
4. Review the TRS Pension Trust Fund Actuarial Valuation as of August 31, 2016 – Joseph Newton, Gabriel, Roeder, Smith & Company. [Estimated time 9:30 – 10:00]
5. Review the TRS-Care Actuarial Valuation and Other Post Employment Benefit (OPEB) reports as of August 31, 2016 and receive an overview and update on TRS-Care and TRS-ActiveCare – Joseph Newton, Amy Cohen, and Eric St. Pierre; Gabriel, Roeder, Smith & Company. [Estimated time 10:00 – 10:30]
6. Receive an update on the TEAM Program and revised schedule – Brian Guthrie. [Estimated time 10:30 – 11:00]
7. Receive a presentation from the TEAM Program Independent Program Assessment (IPA) Vendor – Michael Johnson, Bridgepoint Consulting. [Estimated time 11:00 – 11:15]
8. Receive an update on the Joint Select Committee on TRS Health Benefit Plans – Brian Guthrie. [Estimated time 11:15 – 11:45]
9. Discuss the Executive Director's report on the following – Brian Guthrie: [Estimated time 11:45 – 12:00.]
A. Administrative operational matters, including updates on the following: Executive Director’s goals, financial awareness project, audit, legal, staff services, investments, board administration, special projects, actuarial matters, and strategic planning.
B. Board operational matters, including a review of draft agendas for upcoming meetings.
C. Event notices or reminders; holiday and other schedules of interest; board member, employee, or other individual recognitions; and expressions of thanks, congratulations, or condolences.
10. Discuss and consider investment matters, including: Performance Review: Third Quarter 2016. – Steve Voss and Mike Comstock, Aon Hewitt. [Estimated time 12:00 –12:30]
NOTE: The Board meeting likely will recess after the last item above to conduct committee meetings and will resume Friday morning to take up items listed below.
11. Provide opportunity for public comments – David Kelly. [Estimated time 8:30 – 8:45.]
12. Review the Comprehensive Annual Financial Report for fiscal year 2016 – Jamie Pierce, Ann Zigmond, Cindy Haley and Scot Leith. [Estimated time 8:45 – 9:15.]
13. Review the reports of the Chief Financial Officer regarding expenditures, current financial review, and other financial matters involving TRS programs – Don Green: [Estimated time 9:15 – 9:30.]
14. Receive the Deputy Director’s report, including matters related to administrative, financial and staff services operations – Ken Welch. [Estimated time 9:30 – 9:45.]
NOTE: The Board meeting likely will recess after the last item above to conduct the Audit Committee meeting and will resume to take up items listed below.
15. Receive the report of the Investment Management Committee on its December 1, 2016, meeting. – Joe Colonnetta. [Estimated time 9:45 – 10:00.]
16. Receive the report of the Policy Committee on its December 1, 2016, meeting and consider the following related matters– David Corpus: [Estimated time 10:00 – 10:15.]
A. Adoption of proposed amendments to the following TRS rules in Title 34, Part 3 of the Texas Administrative Code: i. § 23.7, relating to the Code of Ethics for Contractors.
ii. § 23.8, relating to Expenditure Reporting by Certain Contractors. iii. § 25.24, relating to Performance Pay. iv. § 25.31, relating to Percentage Limits on Compensation Increases. v. § 25.303, relating to Calculations of Actuarial Cost for Purchase of
Compensation Credit. vi. § 29.83, relating to Calculation of Amount of Retirement Benefit.
B. Consider proposed amendments to the Soft Dollar Policy.
C. Consider proposed amendments to the Securities Lending Policy.
17. Receive the report of the Risk Management Committee on its December 1, 2016, meeting. – Karen Charleston. [Estimated time 10:15 – 10:30.]
18. Receive the report of the Audit Committee on its December 2, 2016, meeting – Chris Moss. [Estimated time 10:30 – 10:45.]
19. Review the report of the General Counsel on pending and contemplated litigation, including updates on litigation involving benefit-program contributions, retirement benefits, health-benefit programs, and open records – Carolina de Onís. [Estimated time 10:45 – 11:00.]
20. Consider personnel matters in Executive Session, including the appointment, employment, evaluation, reassignment, duties, discipline, or dismissal of a public officer or employee. – David Kelly.
21. Consult with the Board's attorney(s) in Executive Session on any item listed above on this
meeting agenda as authorized by Section 551.071 of the Texas Open Meetings Act (Chapter 551 of the Texas Government Code). – David Kelly.
Minutes of the Board of Trustees
October 27, 2016
The Board of Trustees of the Teacher Retirement System of Texas met on October 27, 2016, in the boardroom located on the fifth floor of the TRS East Building offices at 1000 Red River, Austin, Texas. The following Board members were present:
David Kelly, Chair Karen Charleston David Corpus John Elliott Greg Gibson Dolores Ramirez
The following Board member attended telephonically:
Anita Palmer
Others present:
Brian Guthrie, TRS Philip Mullins, ARTA Ken Welch, TRS Nancy Byler, TRTA Don Green, TRS Marcy Cann, TRTA Carolina de Onís, TRS Bill Barnes, TRTA Katrina Daniel, TRS Tom Rogers, AISD, ARTA Britt Harris, TRS Jane Eixmann, TRTA Jerry Albright, TRS Mary Widmier, TRTA Amy Barrett, TRS Ella Gauthier, TRTA Toma Miller, TRS Mark Wiggins, ATPE Ashley Inman, TRS Ann Fickel, TCTA Katherine Farrell, TRS Ted Melina Raab, Texas AFT Jim Baker, Unite Here Dermot Delude-Dix, Unite Here Brandy Miller, Homeowner
Richard Proffitt, Homeowner Sandra Cohen, Homeowner Brent Hagewood, Humana
Sabina Rahmeen-Garcia, Humana Jennifer Smith, Humana
Pat Del Rio, Aetna Rose Pullen, Aetna Joni Zozaro, Caremark
Mr. Kelly called the meeting to order at 11:10 a.m.
1. Call roll of Board members.
Ms. Farrell called the roll. A quorum was present. Mr. Colonnetta and Mr. Moss were absent. Ms. Palmer attended the meeting telephonically.
2. Consider the following administrative items – David Kelly:
A. Approval of the proposed September 22 and 23, 2016 Board meeting minutes.
The Board unanimously voted to approve the proposed minutes of the September 22 and 23, 2016, Board meeting.
B. Excusing Board member absences from the September 22 and 23, 2016 Board meeting.
On a motion by Ms. Ramirez, seconded by Ms. Charleston, the Board unanimously voted to excuse the absence of Dr. Greg Gibson from September 23, 2016, Board meeting.
C. Setting, rescheduling, or canceling future Board meetings.
No changes to the future Board meetings schedule were addressed.
3. Provide opportunity for public comment – David Kelly.
Mr. Kelly recognized the following officers of the Texas Retired Teachers Association (TRTA) – Nancy Byler, Marcy Cann, Bill Barnes and other local TRTA presidents.
The following individuals made public comments:
Mr. Dermot Delude-Dix, a researcher working with Unite Here, appeared on behalf of the union for hospitality workers. He came with homeowners from Baltimore, Maryland to raise concerns about Oak Tree Capital Management’s investment in residential mortgages.
Ms. Sandra Cohen of Baltimore, Maryland, shared her personal experience with Oak Tree and implored TRS, as a homeowner directly impacted by Oak Tree investments in Baltimore, to hold the companies accountable for actions in their communities.
Mr. Richard Proffitt of Baltimore, Maryland, shared his and his wife’s personal experiences with Oak Tree. Mr. Proffitt requested TRS to investigate Oak Tree and hold them accountable for their actions in his community.
4. Discuss the Executive Director's report on the following – Brian Guthrie: A. Administrative operational matters, including updates on the Executive Director’s
goals; audit, legal, staff services, investment, board administration, special projects, long-term space planning, and strategic planning.
B. Board operational matters, including a review of draft agendas for upcoming meetings.
C. Event notices or reminders; holiday and other schedules of interest; board member, employee, or other individual recognitions; and expressions of thanks, congratulations, or condolences.
Mr. Guthrie provided general updates. The 94th annual NCTR Conference occurred on October 8th through the 12th in Providence, Rhode Island. Mr. Guthrie announced he was reappointed to the executive committee of NCTR at this meeting and will serve another three-year term. On October 12, 2016, Mr. Guthrie testified before the House General Investigating and Ethics Committee on the use of emergency leave. Mr. Guthrie then listed upcoming events, including the semiannual Private/Public SPN Summit in Austin, November 2 and 3, 2016.
Mr. Green provided an update on the automation of the incentive compensation payment process. He thanked Barbara Forssell, Chris Bailey, Scott Leith and Hugh Ohn for helping with the implementation of the new software.
Mr. Guthrie announced Janet Bray had won the National Diversity Council’s 2016 Most Powerful Businesswoman Award.
Mr. Guthrie previewed the annual pension fund valuation that TRS’ actuary, Gabriel, Roeder, Smith & Company (GRS) will present at the December 2016 Board meeting. Mr. Guthrie reported the market return for the past year was 7.3 percent. He said that the unfunded actuarial liability had increased from $33 billion to $35.5 billion. Mr. Guthrie noted the funded ratio is at 79.7 percent.
Mr. Guthrie gave an overview of potential omnibus bill topics. Mr. Guthrie reviewed a few of the recommended changes that are necessary to help administer the plan better or to come into compliance with federal law.
5. Receive an update on the TEAM Program – Brian Guthrie.
Mr. Guthrie announced the transparency report was completed for the Board’s review and consideration. He stated it was a team effort put together by TRS staff, HP, Bridgepoint, and Provaliant and all are in agreement with the metrics that are included. Mr. Guthrie reported as of September 30th, the grade given was a B – minus, slightly above average but with work still needed. Mr. Guthrie reviewed the various components that went into the grade – schedule, cost, quality and individual assessments – three objective components comprising of 90 percent and one subjective component comprising of 10 percent of the grade. Mr. Chet Henry provided further background and information as to how the components were developed.
6. Receive a report from CEM on customer service benchmarks – Rogier Slingerland
Mr. Rogier Slingerland reported CEM Benchmarking (CEM) holds a pension administration conference once a year, it is the largest independent conference in the world. TRS was the co-host this past year, it was the highest rated conference that CEM has ever had. Mr. Slinglerland expressed thanks to Ms. Merrill, Ms. Lamb and Mr. Guthrie and everyone else at TRS that helped make the conference such a success.
Mr. Slingerland reviewed the benchmarking report for fiscal year 2015. There are two comparisons in the report – one is against custom peer group and the other is against an entire universe of participating funds. Mr. Slingerland pointed out that among TRS' peers it has the second lowest total pension administration cost in its peer group and ranks fourth lowest worldwide. He reported TRS is below its peers in every cost category. Mr. Slingerland also reported TRS transactions done per FTE is more productive, 144 percent above the peer average. Mr. Slingerland reviewed the service scoring, TRS ranked very near the peer median. Mr. Slingerland then shared some global trends they have observed. In response to Mr. Guthrie’s inquiry, Mr. Slingerland stated European funds are in some ways ahead of most U.S. funds with chat functions, avatars, really going far in how to service their members.
7. Consider a resolution increasing the amount of the fiscal year 2017 operating budget for the 403(b) Program – Rebecca Merrill.
Ms. Rebecca Merrill reminded the Board that four-year review of the 403(b) rules had begun. She said that the rule review would consider, among other things, fee caps set by the Board on 403(b) vendors. Ms. Merrill noted the need to partner with an outside consultant to provide expertise on how the market is operating to allow for a robust rule review. Ms. Merrill requested as part of the 403(b) budget an additional $70,000. This amount, she said, is to pay the consultant, as well as outside legal counsel regarding identified tax issues. Ms. Merrill informed the Board the 403(b) budget is completely separate from the pension trust fund, requested amounts will come from the registration and certification fees paid for by the 403(b) vendors.
On a motion by Dr. Gibson, seconded by Mr. Corpus, the Board voted unanimously to adopt the resolution to increase the 403(b) budget as proposed by staff.
8. Discuss and consider personnel matters, the appointment, employment, evaluation, reassignment, duties, discipline, dismissal and other personnel matters involving compensation, of a public officer or employee, including the following:
A. Adoption of a resolution regarding the salary limit for the Deputy Director Investment Officer listed as an exempt position in the 2016-2017 General Appropriations Act.
B. Senior executive staff succession plan.
Mr. Guthrie provided a brief overview on the agency wide succession plan. Mr. Guthrie stated they have gone through a process of identifying not only those eligible to retire but also high potential employees and preparing them for advancement into critical positions which are key to the success of the business operations and objectives. Mr. Guthrie noted there are 66 critical positions in terms of business continuity and 77 high potential employees who are in a position to perhaps fill those critical positions. Mr. Guthrie reviewed each of the divisions and the percentage of employees already eligible to retire now and by 2022.
Mr. Guthrie reviewed the resolution for increasing the salary limit of the Deputy Director Investment Officer.
On a motion by Ms. Ramirez, seconded by Mr. Corpus, the Board unanimously voted to approve the resolution as proposed by staff to increase the not to exceed rate by 5 percent for the Deputy Director Investment Officer.
Mr. Kelly then announced at 1:10 p.m. the Board would go into executive session on agenda items 8(a) and (b) under Sections 551.074 and 551.071 of the Government Code to discuss personnel matters and to consult with legal counsel as needed.
9. Consult with the Board's attorney(s) in Executive Session on any item listed above on this meeting agenda as authorized by Section 551.071 of the Texas Open Meetings Act (Chapter 551 of the Texas Government Code) – David Kelly.
This agenda item was not taken up.
At 2:27 p.m. the Board reconvened in open meeting.
At 2:28 p.m., Dr. Gibson moved, Ms. Charleston seconded, and the Board unanimously voted to adjourn.
Copyright © 2016 GRS – All rights reserved.
Teacher Retirement System of Texas
Actuarial Valuation as of August 31, 2016
Agenda
2016 Valuation Results No changes to assumptions, benefits, or contribution
rates since last year
Historical Metrics
Potential Impact of Deferred Investment Losses
Sensitivity to Investment Returns
Discussion of Investment Risks
Historical Change in Unfunded Liability
Impact on the “Plan”
Summary
2
Actuarial Valuation
Prepared as of August 31, 2016 using member data, financial data, benefit and contribution provisions, actuarial assumptions and methods as of that date
Purposes:
Measure the actuarial liabilities
Determine adequacy of current statutory contributions
Provide other information for reporting
– CAFR
– Accounting results provided under separate report
Explain changes in actuarial condition of TRS
Track changes over time
Warn about possible future problems and issues
3
Actuarial Valuation – Key Changes and Issues
Forecast mostly unchanged from previous valuation: Market assets returns 7.3%, net of investment expenses
Continued recognition of previous deferred investment losses
Small liability loss primarily due to salary increases larger than expected
Material population growth (+2.3%) held funding period down
Funding period of 34 years based on smoothed assets Assumes all current statutory contribution levels continue and no
further benefit enhancements
Projections have an expectation of an increasing funded status after existing deferred losses are fully recognized
Although will decrease funded status over the short term if not offset by gains
4
5
2016 Valuation Results
2016 Valuation
2015 Valuation
2014 Valuation
Based on Smoothed Asset Value
UAAL ($ Billions) $35.45 $32.97 $31.64
Actuarial Funded Ratio 79.7% 80.2% 80.2%
Funding Period in years* 33.9 33.3 29.8
Increase in Contribution Rate needed to have 30 year funding period 0.26% 0.23% NA
Based on Market Value
Actuarial Funded Ratio 76.9% 77.2% 83.0%
Funding Period in years* 54.5 56.4 22.8
Increase in Contribution Rate needed to have 30 year funding period 1.02% 1.06% NA
*Assumes current statutory contribution rates continue indefinitely
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0 5 10 15 20 25 30 35 40 45 50
Peer Employer Contribution Rates by State: Teachers Plans
Not covered by Social Security Also covered by Social Security
Source: 2015 Public Funds Survey 6
TRS 7.7%
TRS 7.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
0 5 10 15 20 25 30 35 40 45 50
Peer Employee Contribution Rates by State: Teachers Plans
Not covered by Social Security Also covered by Social Security
Source: 2015 Public Funds Survey 7
8
Next Year Projections (from 2015)
Market Return for 12 month period ending August 31, 2016
12% 8% 4% Actual (7.3%)
UAAL $33.9 $35.1 $36.1 $35.5
Funded Ratio 80.3% 79.6% 79.0% 79.7%
Funding Period based on new contribution policy
Smoothed Assets 32.4 35.7 38.9 33.9
Market Assets 33.1 55.4 Never 54.5
UAAL ended up slightly higher due to liability growth more than expected Funded Ratio essentially right on target Funding Period better than expected due to 2% growth in active membership
Maximum UAAL
How large can the UAAL be given a specific contribution rate and still produce a 30 year funding period
5.35% * $42.2 B Payroll (estimated FY2017) * 14.96 (30 year amortization factor) = $33.8 B
How large can the UAAL be given a specific contribution rate and still produce a measureable funding period
5.35% * $42.2 B Payroll (estimated FY2017) * 18.80 (100 year amortization factor) = $42.5 B
9
Estimated Yields Based on Market Value of Assets
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Market 14.4% -4.2% -13.5% 10.7% 15.5% 7.4% 8.9% 16.8% -0.3% 7.3%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
5.88% average compound return (on market value) over last 10 years. 7.48% over last 20 years.
8.78% since 1989
8.00%
5.88%
10
Market and Actuarial Values of Assets
8% Hypothetical assumes 8% had been earned on market every year since 1996, all cash flows unchanged
7.48% average compound return (on market value) over last 20 years.
$0
$20
$40
$60
$80
$100
$120
$140
$160
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Market Actuarial 8% Hypothetical
$ Billions
11
Actuarial Values of Assets vs. Actuarial Accrued Liability
$0.0
$50.0
$100.0
$150.0
$200.0
1996 2000 2004 2008 2012 2016
Liability Assets
$ Billions
12
Funded Ratio
81.5%
97.9%
95.7%
107.4%
87.1%
90.5%
79.7%
60.0%
80.0%
100.0%
1987 1991 1995 1999 2003 2007 2011 2015
13
Funded Ratio: Smoothed vs Market
88.6% 107.4%
83.4%
121.8%
80.3%
96.7%
69.2% 76.9%
0%
20%
40%
60%
80%
100%
120%
140%
1990 1994 1998 2002 2006 2010 2014
Funded Ratio Smoothed Funded Ratio on Market
14
15
Next Year Projections
Market Return for 12 month period ending August 31, 2017
16% 12% 8% 4% 0% -4%
UAAL $35.0 $36.1 $37.6 $38.7 $39.7 $40.8
Funded Ratio 80.5% 80.0% 79.1% 78.5% 77.9% 77.3%
Funding Period based on new contribution policy
Smoothed Assets 30.2 32.5 36.7 40.1 44.2 49.3
Market Assets 23.0 32.5 53.5 Never Never Never
Current values: UAAL of $35.5 billion, funded ratio of 79.7%, Funding period of 33.6 on smoothed assets and 53.6 on market A 12% return on MVA is necessary to completely offset current deferred losses
16
Benchmarking - Funded Ratio
The funded ratio of TRS ranks in the 64th percentile of a comparison with other large public employee retirement systems
► TRS – 79.7%
► 75th percentile – 85.1% ► 50th percentile – 74.9% ► 25th percentile – 62.0%
Percentile Ranking
Fu
nd
ed S
tatu
s
Source: Public Funds Survey
0%
20%
40%
60%
80%
100%
120%
140%
1% 21% 41% 62% 82%
Projection of Funded Ratio
50%
60%
70%
80%
90%
100%
2014 2017 2020 2023 2026 2029
Projected from 2014 ValuationProjected from 2015 ValuationProjected from 2016 Valuation (Smoothed)Projected from 2016 Valuation (Market)
All projections assume contribution policy outlined in statute continues indefinitely and no future changes to benefits 17
Projection of Funded Ratio Investment Return Sensitivity
50%
60%
70%
80%
90%
100%
2015 2018 2021 2024 2027 2030
2016 Valuation, 8.50% Future Returns
Projected from 2016 Valuation (market)
2016 Valuation, 7.50% Future Returns
2016 Valuation, 7.00% Future Returns
All projections assume contribution policy outlined in statute continues indefinitely and no future changes to benefits
18
Historical Volatility Scenarios
Investment Risk is typically illustrated based on absolute return If the System actually earns 7% over time, the outcome
would look like this…..
However, there is more that that, especially when negative cash flows are introduced: Volatility can put a drag on actual asset values Order matters
To illustrate these other areas of risk, we have prepared our projections using scenarios that all achieve an 8% return over a 20 year time horizon, but instead of earning 8% each year, the scenarios are based on historical volatility patterns
19
Historical Volatility Scenarios
For example, the period 1995-2014 achieved a compound return of 8.5%
Thus, to create our example, we subtracted 0.5% from each year’s return
This holds order and magnitude of volatility in place, while removing absolute return risk
20
-20%
-10%
0%
10%
20%
30%
Actual Returns 1995 - 2014 (8.5% Compound Return) 8% Illustration
0%
20%
40%
60%
80%
100%
120%
140%
160%
Funded Ratio
1995-2014
1985-2005
1975-1995
1965-1985
1955-1975
1945-1965
8% Deterministic
Projection Scenarios Based on Historical Volatility Patterns
The above scenarios all achieve an 8% compound return over a 20 year period. Actual returns each year are based on the actual historical pattern during the range provided, with an overall adjustment to achieve an 8% return.
21
- 10 20 30 40 50 60 70 80 90
100
Funding Period
1995-2014
1985-2005
1975-1995
1965-1985
1955-1975
1945-1965
Projection Scenarios Based on Historical Volatility Patterns
The above scenarios all achieve an 8% compound return over a 20 year period. Actual returns each year are based on the actual historical pattern during the range provided, with an overall adjustment to achieve an 8% return.
22
Current UAAL and Funding Policy
The following slides
break the current UAAL down by source
illustrate the impact the current funding policy is having on the annual growth in the UAAL
provide short term projections of the UAAL by source
provide longer term projections of the UAAL
23
Sources of Change in UAAL in 2016 Valuation
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
Normal CostAccruals
Interest Charges Contributions Assets Liabilities
+/- i
n m
illio
ns An Asset loss
occurs if actual investment
performance is less than the
assumption
A loss can also occur if liabilities grow faster than
expected
24
Current Contributions are not enough to cover normal cost plus interest on the UAAL, thus, the UAAL is anticipated to grow each year. This will continue until the funding period decreases to approximately 20 years.
10 Year Source of Change in UAAL
25
13,694
7,562
3,370
(3,847)
708
13,967
4,777
-$20,000
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
$ in
mill
ions
Valuation Year
2006 UAAL Contribution Shortfall/Unpaid Interest on UAALAssumption Changes Liability ExperienceBenefit Changes Investment Gains/Losses - RecognizedInvestment Gains/Losses - Deferred Net Unfunded Liability
$13,694
$10,713
$3,370
$(3,847)
$708
$19,492
-$20,000
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
$ in
mill
ions
Valuation Year
2006 UAAL Contribution Shortfall/Unpaid Interest on UAAL Assumption ChangesLiability Experience Benefit Changes Investment Gains/Losses - RecognizedInvestment Gains/Losses - Deferred Net Unfunded Liability
Projected UAAL by Source of Change
26 Years after 2016 assume 8% earnings on the market value of assets and all other assumptions met
Projection of UAAL (Based on Smoothed Assets)
$0
$10
$20
$30
$40
$50
2014 2018 2022 2026 2030 2034 2038 2042 2046 2050
2014 Projection 2015 Projection 2016 Projection
$ Billions
The above assumes all assumptions exactly met, including 8% annual investment returns
Assumes no changes to benefit policy
Assumes current statutory contribution policy remains throughout period
27
Projection of UAAL based on Market Asset Values on each Valuation Date (2014, 2015, 2016)
$0
$10
$20
$30
$40
$50
$60
$70
2014 2018 2022 2026 2030 2034 2038 2042 2046 2050
2014 Projection2015 Projection2016 Projection2016 Projection (off of Smoothed Assets)
$ Billions
The above assumes all assumptions exactly met, including 8% annual investment returns on current market assets
Assumes no changes to benefit policy
Assumes current statutory contribution policy remains throughout period
28
Currently deferring $4.8 B investment losses Enough to make a 20 year difference in the funding period
Projection of UAAL based on Market Asset Values on each Valuation Date (2014, 2015, 2016)
$-
$10
$20
$30
$40
$50
$60
$70
2016 2020 2024 2028 2032 2036 2040 2044 2048
2016 Projection (MVA) with 1% Annual Population Growth2016 Projection (MVA)2016 Projection (off of Smoothed Assets)
$ Billions
The above assumes all assumptions exactly met, including 8% annual investment returns on current market assets
Assumes no changes to benefit policy
Assumes current statutory contribution policy remains throughout period
29
1% Annual Population Growth Enough to make a 11 year difference in the funding period
Summary
Based on Smoothed Assets, the funding period is 34 years
However, there are currently deferred investment losses, and it will take either better than anticipated investment experience better than anticipated demographic experience increased contributions time or a combination thereof to attain a funding period at or below 30 years based on the current benefit package
Projections expect the UAAL to increase in nominal dollars over the next
15-25 years before beginning to decrease The ride is likely to be volatile
Any future benefit enhancements need to be supported by a
representative increase in revenue
30
Copyright © 2015 GRS – All rights reserved.
Health Benefits Briefing
Teacher Retirement System of Texas December 1, 2016
TRS-Care Health Care Program For Retired Public School Employees and Their Dependents
2
History
3
Created in 1985 with coverage beginning September 1, 1986
Historically operates through a separate trust fund
Provides health coverage for retired Texas public school employees
Higher education retirees are generally covered by ERS, UT or A&M
Benefits are provided through medical and pharmacy networks
Medical benefits administered by Aetna
• Self-funded PPO plan design options
• Fully insured Medicare Advantage plan options
Pharmacy benefits administered by Express Scripts
• Self-funded prescription drug benefits for non-Medicare participants
• Self-funded Medicare Part D drug benefits for Medicare participants
Medical Plan Design
4
TRS-Care 1 TRS-Care 2 TRS-Care 3 Medicare
Advantage for TRS-Care 2
Medicare Advantage for
TRS-Care 3
Eligibility All members Members with both Medicare Part A & B
Deductible $2,350/$4,700 Parts A&B $3,900/$7,800 Part B Only
$5,250/$10,500 Non-Medicare $1,300/$2,600 $400/$800 $500 $150
Maximum Out-of-Pocket (MOOP)1,2
$6,250/$12,500 Parts A&B $7,800/$15,600 Part B Only
$8,250/$16,500 Non-Medicare $5,800/$11,600 $4,900/$9,800 $3,500 $3,150
Coinsurance
80%/20% (after Medicare payment)
80%/20% (after Medicare
payment)
80%/20% (after Medicare
payment)
95%/5% 95%/5%
Inpatient Hospital Facility
$500 copay per stay
$250 copay per stay
Outpatient Hospital Facility $250 copay $75 copay
Emergency Room $65 copay $50 copay
Urgent Care $35 copay $35 copay
Office Visits $5 PCP $10 Specialist
$5 PCP $10 Specialist
1 MOOP includes medical and pharmacy deductible, coinsurance and copayments for TRS-Care 1. 2 MOOP includes medical deductible, coinsurance and copayments for TRS-Care 2 and TRS-Care-3.
Prescription Drug Plan Design
5
TRS-Care 1 TRS-Care 2 TRS-Care 3 Medicare Part D for TRS-Care
2
Medicare Part D for TRS-Care
3
Eligibility All members All members Members with either Medicare Part A or B
Retail Copays2
80%/20% coinsurance1
Generic $13 $13 $5 $5
Preferred Brand $40 $30 $25 $20
Non-Preferred Brand $65 $50 $50 $40
Specialty Tier Drugs $65 $50 $50 $40
Mail Order Copays
Generic $25 $25 $15 $15
Preferred Brand $100 $65 $70 $45
Non-Preferred Brand $165 $105 $125 $80
Specialty Tier Drugs $165 $105 $125 $80
1 Prescription drug benefits under TRS-Care 1 are subject to the medical deductible, coinsurance and out-of-pocket maximum limits. 2 Under the traditional TRS-Care 2 and TRS-Care 3 plans, maintenance medications filled at a retail pharmacy are subject to an additional $10 convenience fee after the first fill.
August 2016
Participation by Plan
6
Fiscal Year Average Membership
Percent Change
2010 204,382 2.2%
2011 210,828 3.2%
2012 223,287 5.9%
2013 234,234 4.8%
2014 243,344 4.0%
2015 251,758 3.5%
2016 259,889 3.2%
2017 267,114 2.8%
August 2016
Participation by Medicare Status
7
August 2016
Distribution of Members
8
TRS-Care Funding Sources
9
State Contributions 1.0% of public education payroll Supplemental funding
Active Employee Contributions – 0.65% of employee’s salary School District Contributions – 0.55% of employee’s salary Retiree Contributions – tiered by years of service and Medicare status for TRS-
Care 2, TRS-Care 3 and dependent coverage Employer Surcharge to account for the “Return to Work” retirees Prescription Drug Subsidies
Retiree Drug Subsidy (RDS) PDP Subsidy Coverage Gap Discounts Catastrophic Reinsurance
Investment Income
Retirees also pay substantial amounts for deductibles, copays, medical coinsurance and Medicare Part B Premiums
TRS-Care Funding Sources
10
$1.3 billion was provided by multiple funding sources for TRS-Care.
State, District and Active Employee Contributions are based on a percentage of active employee payroll rather than by medical trend.
Retiree Premium Contributions
11
TRS-Care 1 The law requires that a catastrophic plan be offered at no cost for retiree only
coverage. Retirees pay for coverage of his/her dependents
TRS-Care 2 and TRS-Care 3 Retiree premium contributions for optional coverages are based on plan election,
Medicare status and Years of Service. Monthly retiree premiums for both Medicare Advantage plans are $15 less than the
premium for the traditional medical plans. Monthly retiree premiums shown below are for 20-29 Years of Service
TRS-Care 2 TRS-Care 3 Medicare Status Retiree Only Retiree & Spouse Retiree Only Retiree & Spouse
Medicare Parts A&B $70 $175 $100 $255
Medicare Part B Only $155 $340 $230 $505
Non-Medicare $200 $430 $295 $635
TRS-Care Expenses
12
Medical and pharmacy claims accounted for 92.4% of expenses during FY2016.
Administration fees paid to both the health plan administrator and the PBM accounted for less than 3% of expenses.
Average Medical Cost Per Member
13 Medical costs reflect the average cost of both the self-funded medical claims and Medicare Advantage premiums. Self-funded costs are shown based on claims incurred during the fiscal year and paid through September 30, 2016. FY2016 figures include an estimate of IBNR.
Medical Claims Per Member
14 Medical costs reflect the average cost of both the self-funded medical claims and Medicare Advantage premiums. Self-funded costs are shown based on claims incurred during the fiscal year and paid through September 30, 2016. FY2016 figures include an estimate of IBNR.
Pharmacy Claims per Member
15 Pharmacy costs are shown on an incurred basis net of pharmaceutical rebates.
Pharmacy Claims per Member
16 Pharmacy costs are shown on an incurred basis, excluding the impact of pharmaceutical rebates.
TRS-Care Historical Expenditures
17 Medical and pharmacy costs include invoiced self-funded claims; administrative fees include ASO fees, PPACA fees and MA premiums.
TRS-Care Funding Financial History & Projection Through FY2021 with Data Through August 2016
18
Fiscal Year Retiree Contributions
State Contributions
Supplemental Appropriations
Active Employee Contributions
District ContributionsInvestment
IncomeCMS& Part D
SubsidiesERRP Subsidy Medical Incurred Drug Incurred
Medicare Advantage Premiums
Administrative Costs
Ending Balance (Incurred Basis)
FY 1986 $0 $0 $250,000 $17,625,194 $0 $572,153 $0 $0 $0 $0 $0 $362,371 $18,084,976FY 1987 $22,617,624 $25,931,680 $0 $18,522,629 $0 $2,568,998 $0 $0 $50,988,845 $7,044,825 $0 $3,941,936 $25,750,301FY 1988 $23,948,600 $31,357,632 $0 $19,598,520 $0 $5,703,832 $0 $0 $16,157,649 $12,441,672 $0 $4,614,755 $73,144,809FY 1989 $25,428,632 $37,420,711 $0 $20,789,215 $0 $8,802,914 $0 $0 $32,926,324 $15,458,710 $0 $5,212,073 $111,989,174FY 1990 $37,556,561 $44,369,915 $0 $22,184,958 $0 $13,098,835 $0 $0 $50,171,919 $19,835,965 $0 $7,186,851 $152,004,708FY 1991 $46,563,787 $47,277,743 $0 $23,638,871 $0 $15,801,047 $0 $0 $82,697,189 $28,683,081 $0 $8,258,029 $165,647,857FY 1992 $56,395,797 $50,392,512 $0 $25,196,592 $0 $17,314,372 $0 $0 $74,307,953 $33,829,694 $0 $8,862,560 $197,946,923FY 1993 $65,154,653 $54,029,406 $0 $27,014,703 $0 $17,181,190 $0 $0 $101,627,864 $40,700,513 $0 $10,067,359 $208,931,140FY 1994 $80,128,944 $56,912,083 $0 $28,456,041 $0 $16,467,438 $0 $0 $108,284,693 $45,712,060 $0 $11,668,828 $225,230,065FY 1995 $89,006,331 $59,849,850 $0 $29,924,925 $0 $16,841,673 $0 $0 $122,054,551 $50,782,093 $0 $12,219,847 $235,796,353FY 1996 $82,622,236 $63,634,087 $0 $31,817,043 $0 $16,818,747 $0 $0 $135,982,304 $57,074,921 $0 $13,593,578 $224,037,663FY 1997 $87,657,784 $67,616,395 $0 $33,808,197 $0 $16,202,440 $0 $0 $148,823,489 $62,530,982 $0 $14,097,454 $203,870,554FY 1998 $91,390,173 $72,210,190 $0 $36,105,095 $0 $15,260,517 $0 $0 $156,537,913 $76,256,158 $0 $14,616,678 $171,425,780FY 1999 $96,474,107 $76,488,424 $0 $38,244,213 $0 $9,762,741 $0 $0 $184,398,533 $93,459,890 $0 $14,905,196 $99,631,646FY 2000 $120,227,960 $85,505,637 $0 $42,738,069 $0 $6,923,485 $0 $0 $203,029,971 $110,903,247 $0 $16,837,127 $24,256,451FY 2001 $131,213,445 $90,118,787 $76,281,781 $45,059,394 $0 $5,824,134 $0 $0 $250,691,898 $139,774,848 $0 $18,237,767 ($35,950,521)FY 2002 $143,797,748 $94,792,026 $285,515,036 $47,378,092 $0 $7,140,560 $0 $0 $287,729,918 $163,979,754 $0 $19,017,292 $71,945,978FY 2003 $162,954,010 $98,340,798 $124,661,063 $49,170,399 $0 $3,394,956 $0 $0 $368,462,963 $203,281,400 $0 $21,690,329 ($82,967,487)FY 2004 $248,552,679 $198,594,194 $298,197,463 $99,297,097 $79,457,387 $4,840,982 $0 $0 $366,840,457 $214,514,500 $0 $26,332,200 $238,285,158FY 2005 $322,780,191 $202,397,566 $64,172,167 $101,198,783 $80,914,228 $11,300,868 $0 $0 $431,036,095 $229,522,988 $0 $33,333,010 $327,156,868FY 2006 $326,844,982 $215,666,940 $0 $140,183,511 $118,607,527 $21,435,792 $34,611,607 $0 $427,553,404 $259,532,887 $0 $34,434,969 $462,985,967FY 2007 $323,957,945 $238,190,720 $0 $154,823,968 $136,008,512 $32,671,539 $52,329,617 $0 $437,519,747 $304,773,401 $0 $35,878,194 $622,796,927FY 2008 $328,505,433 $254,722,174 $0 $165,569,413 $141,672,630 $29,252,347 $59,486,239 $0 $498,767,038 $334,742,500 $0 $39,656,301 $728,839,324FY 2009 $329,723,191 $267,471,299 $0 $173,856,344 $149,562,613 $17,482,143 $61,530,735 $0 $531,239,020 $353,893,845 $0 $43,184,393 $800,148,391FY 2010 $332,481,933 $279,250,547 $0 $181,512,856 $155,918,241 $11,679,229 $70,795,686 $0 $575,539,788 $395,817,017 $0 $45,465,776 $814,964,302FY 2011 $345,164,271 $282,782,431 $0 $183,808,580 $158,724,010 $8,168,640 $66,258,008 $70,629,797 $608,461,321 $384,017,059 $0 $47,151,354 $890,870,304FY 2012 $363,348,030 $271,925,242 $0 $176,751,407 $154,607,926 $5,189,934 $71,575,942 ($2,941,996) $687,987,585 $454,143,825 $0 $48,181,723 $741,013,656FY 2013 $355,685,504 $139,213,557 $102,363,704 $180,824,522 $160,952,396 $3,041,001 $98,628,841 $0 $686,321,003 $496,229,923 $1,075,388 $47,048,587 $551,048,281FY 2014 $363,631,292 $290,775,235 $36,058,148 $189,003,903 $169,847,447 $2,061,745 $135,536,021 $0 $663,776,623 $539,842,962 $27,507,107 $48,894,894 $457,940,487FY 2015 $369,066,459 $304,917,343 $768,100,754 $198,196,273 $179,157,485 $1,495,680 $200,321,166 $0 $746,668,738 $649,457,501 $59,000,080 $51,150,088 $972,919,240FY 2016 $374,736,269 $320,895,370 $0 $208,581,991 $189,111,901 $5,421,446 $198,315,301 $0 $789,756,266 $716,536,786 $69,228,872 $52,973,441 $641,486,153
FY 2017 $384,858,372 $332,126,708 $15,651,511.04 $215,882,360 $195,466,131 $2,317,342 $203,721,799 $0 $789,369,355 $850,111,662 $66,084,946 $55,582,746 $230,361,668FY 2018 $389,991,047 $343,751,143 $0 $223,438,243 $201,859,570 $554,102 $249,522,669 $0 $831,605,553 $1,009,113,962 $77,065,127 $56,832,285 ($335,138,485)FY 2019 $395,413,206 $350,626,166 $0 $227,907,008 $205,640,832 $0 $284,078,259 $0 $874,273,706 $1,173,642,378 $110,973,452 $57,886,963 ($1,088,249,515)FY 2020 $400,140,119 $357,638,689 $0 $232,465,148 $209,497,720 $0 $321,468,405 $0 $918,050,186 $1,352,418,326 $127,635,321 $58,512,125 ($2,023,655,392)FY 2021 $401,947,666 $364,791,463 $0 $237,114,451 $213,431,746 $0 $361,633,499 $0 $961,000,731 $1,540,903,853 $146,348,201 $59,540,494 ($3,152,529,846)
NOTES Invoice data through August 31, 2016 This purpose of this report is to project revenue and expenses on an incurred basis and should not be used as a projection of cash flow. 68% participation in Medicare Advantage and 80% participation in Part D plan, which were effective 1/1/2013. State Contribution rate of 1%; District Contribution rate of 0.55%; and Active Contribution rate of 0.65%. Enrollment assumptions based on headcounts assumed in annual Other Post Employment Benefits (OPEB) valuation report. 4.5% payroll growth in FY2016; 3.5% payroll growth in FY2017 and FY2018; 2% increase in payroll growth thereafter. Medical trends: 7.0% for Care 1; 7.0% for Care 2; 7.0% for Care 3 through FY2017; reduced by 0.25 each year thereafter. Pharmacy trends: 12% for Care 2; 12% for Care 3; 12% for Medicare Part D plans, reduced by 0.50 each year thereafter. Interest Rate = 0.4% Medicare Part D Risk Score of 0.870 beginning January 1, 2016
ExpendituresContributions
TRS-Care Revenue vs. Incurred Costs
19
Cost Drivers
20
Increases in medical cost of services Increases in prescription drug costs Maintaining access and choice in managing providers Increased utilization due to an aging population Changes in the number of retirees in the group, particularly Non-
Medicare Changes in the Medicare programs
Medicare primary benefits for members enrolled in the self-funded plans CMS reimbursements for Fully insured Medicare Advantage and Medicare
Part D plans
Advances in technology for medical testing/equipment
Development of new specialty and biogenetic drugs
Federal and state legislation
TRS-Care Funding Financial History & Projection Through FY2020 with Data Through August 2015
21
TRS-ActiveCare Health Care Program For Employees and Dependents of Public Education Entities
22
History
23
Created in 2001 with coverage beginning on September 1, 2002 Medical benefits administered by Blue Cross Blue Shield on a self-funded
basis Prescription drug benefits administered by Medco (Express Scripts, Inc.) on
a self-funded basis
Effective September 1, 2014, plan design changes were implemented Medical benefits administered by Aetna on a self-funded basis
Prescription drug benefits administered by CVS/Caremark on a self-funded basis
Approximately 11.2% of the covered population has elected coverage in the fully insured HMO plans
TRS-ActiveCare Plan Design
24
1 MOOP includes deductible, coinsurance and copayments for medical and pharmacy benefits.
In-Network Medical Benefits
TRS-ActiveCare 1-HD TRS-ActiveCare Select TRS-ActiveCare-2
Deductible $2,500/$5,000 $1,200/$3,600 $1,000/$3,000
Maximum Out-of-Pocket1 $6,550/$13,100 $6,850/$13,700 $6,850/$13,700
Preventive Services Plan pays 100% Plan pays 100% Plan pays 100%
Coinsurance 80%/20% 80%/20% 80%/20%
Hospital Facility 80%/20% $150 copay per day, plus 20%
$150 copay per day, plus 20%
Physician Office Visits 80%/20% $30 PCP copay $60 Specialist copay
$30 PCP copay $50 Specialist copay
Urgent Care Center 80%/20% $50 copay $50 copay
Teledoc $40 consult fee Plan pays 100% Plan pays 100%
Bariatric Surgery $5,000 copay plus 20% after deductible Not covered $5,000 copay plus 20%
after deductible
Prescription Drug 80%/20% See Slide 26 See Slide 26
TRS-ActiveCare Plan Design
25
Out-of-Network Medical Benefits
TRS-ActiveCare 1-HD TRS-ActiveCare Select TRS-ActiveCare-2
Deductible $2,500/$5,000
No out-of-network benefits
$1,000/$3,000
Maximum Out-of-Pocket2 $6,550/$13,100 $6,850/$13,700
Preventive Services 60%/40% 60%/40%
Coinsurance 60%/40% 60%/40%
Hospital Facility 60%/40% $150 copay per day, plus 40%
Physician Office Visits 60%/40% 60%/40%
Urgent Care Center 60%/40% 60%/40%
Bariatric Surgery Not covered Not covered 2 MOOP includes deductible, coinsurance and copayments for medical and pharmacy benefits.
TRS-ActiveCare Plan Design
26
Pharmacy Benefits
TRS-ActiveCare Select TRS-ActiveCare 2
Retail Short Term (1-31 days supply)1
Generic $20 copay $20 copay
Preferred Brand $40 copay $40 copay
Non-Preferred Brand 50% coinsurance $65 copay
Retail-Plus (60-90 days supply)
Generic $45 copay $45 copay
Preferred Brand $105 copay $105 copay
Non-Preferred Brand 50% coinsurance $180 copay
Mail Order
Generic $45 copay $45 copay
Preferred Brand $105 copay $105 copay
Non-Preferred Brand $50% coinsurance $180 copay
Specialty Drugs 20% coinsurance per fill $200 per fill (1-31 days supply) $450 per fill (32-90 days supply)
1 Retail Maintenance drugs copays are an additional $5, $10 or $15 if the member continues to have the script filled at a retail pharmacy.
Plan Design Changes for FY2017
27
FY2016 FY2017
Individual Family Individual Family Maximum Out-of-Pocket
TRS-ActiveCare 1-HD $6,450 $12,900 $6,550 $13,100
TRS-ActiveCare Select* $6,600 $13,200 $6,850 $13,700
TRS-ActiveCare 2* $6,600 $13,200 $6,850 $13,700
* Maximum Out-of-Pocket limits include deductibles, copayments and coinsurance for both medical and pharmacy benefits.
TRS-ActiveCare Participation
28
Entity Type # Eligible #Participating % Participation
Less than 500 809 794 98.1%
500-1,000 104 91 87.5%
More than 1,000 107 57 53.3%
Charter 172 128 74.4%
RSC 20 20 100%
Other Ed 5 5 100%
Total 1,217 1,095 90.0%
August 2016
TRS-ActiveCare Participation
29
Fiscal Year Average Membership
Percent Change
2010 380,688 10.5%
2011 417,784 9.7%
2012 444,263 6.3%
2013 445,920 0.4%
2014 421,303 -5.5%
2015 432,515 2.7%
2016 429,635 -0.7%
TRS-ActiveCare Participation
30
TRS-ActiveCare Claims Cost
31 Medical and pharmacy costs are shown based on claims incurred during the fiscal year and paid through September 30, 2016. FY2016 figures include an estimate of IBNR. Prescription drug claims are net of pharmaceutical rebates.
TRS-ActiveCare Funding
32
State & District Contributions The State contributes $75 per employee per month through school finance formulas Districts are required to contribute at least $150 per employee per month but may contribute more Funding requirements have not changed since program inception in 2002
Employee Contributions Vary by plan election and coverage tier
TRS-ActiveCare Funding
33 Source: Kaiser /HRET Survey of Employer-Sponsored Health Benefits, 1999-2015.
Cost Drivers
34
Increase in the number of participating entities Increases in medical cost of services Increases in prescription drug costs Maintaining access and choice in managing providers Advances in technology for medical testing/equipment
Development of new specialty and biogenetic drugs
State and District contributions are not linked to industry trend
Potential adverse selection due to the availability of public exchanges
Federal and state legislation
84th Legislature
35
H.B. 2 - Approved supplemental funding of $768 million into the TRS-Care fund
H.B. 2947 and S.B. 1940 - Establishes a 6 member committee of both house and senate members to conduct an interim study of TRS-Care and TRS-ActiveCare. Examine the financial soundness of the Plan; Assess the cost and affordability of the Plan; Evaluate the sufficiency of access to physicians and health care providers; Estimate the impact of allowing school districts and other participating entities in TRS-ActiveCare
to opt out of TRS-ActiveCare; Estimate the impact, should participating entities be authorized to opt out of TRS-ActiveCare, of
allowing or prohibiting future participation by previous participating entities that have opted out; and
Estimate the impact of establishing a regional rating method for determining premiums charged in different regions of the state for the benefits provided under TRS-ActiveCare.
The Joint Interim Committee released its report to the 85th Legislature of the TRS Health Benefit Plans in November 2016.
TEAM Program Update >>> September 23, 2016
TEAM PROGRAM
TEAM PROGRAM - Agenda
• Execution
• Budget Impact
• Improvements
• Accomplishments
• Near Term Goals
• Upcoming Schedule
1
Agenda
TEAM PROGRAM – Execution
– September
– October
2
TEAM Transparency Report – Project Execution Scores
TEAM PROGRAM – Execution
2
TEAM Transparency Report – Project Execution Category Scores
TEAM PROGRAM – Budget Impact
• Pension Line of Business
– Health Care
– Customer Relationship Management (CRM) / Workflow
16
Budget Information
TEAM PROGRAM – Improvements
• Risk Management
• Focus on Phase 2 quality improvement
• Project Reporting
• Governance Structure
23
Process Improvements Made Since September Board Meeting
TEAM PROGRAM - Accomplishments
• The Website Redesign Project was completed on time and under budget.
• As of November 14, 2016, out of the 1,321 Reporting Entities (REs), 1,104 have started the certification process and, of those, 635 have completed their certification. There are 217 REs that have not yet started the certification process.
35
Accomplishments Since September Board Meeting
TEAM PROGRAM - Accomplishments
• Finalized the contract changes with HPE on the pension line of business project
• A Business process oriented approach being developed jointly by HPE and TRS for Phase 2
35
Accomplishments Since September Board Meeting
TEAM PROGRAM – Near Term Goals
• Completed– TRS Executives “hands on” oversight
– Assigned high level staff Program Director
– Increase coordination of TRS, HPE, Provaliant & Bridgepoint
– Implemented AGILE methodology including regular “standup” meetings
– Agreed upon metrics and regular TEAM Transparency Reporting
• Ahead of schedule– Initiate Phase 2 Requirements Planning
35
Near Term Goals and Progress
TEAM PROGRAM – Near Term Goals
• On track
– Finish deployment of Phase 1 during FY 2017
– HPE implementing “Lessons Learned” from Phase 1
– Phase 2 deployment by end of next biennium
– Joint TRS/HPE Business Function Testing process
• Behind
– Baselining Phase 2 project plans
35
Near Term Goals and Progress
TEAM PROGRAM – Upcoming Schedule
35
Schedule Graph Legend
= Overall baseline activity
= Progress against the activity
= Completed activity
Organizational Change Management
OCM is a set of strategies and tactics designed to:
◦ Minimize employee fears and anxieties related to a change initiative
◦ Ensure that employees possess the knowledge and skills required to successfully transition to the new state
Our business is focused on the people side of change.
OCM Listens OCM Responds
Employees want to know what is going on
Employees want to be heard
We provide:
• A TEAM Connect Intranet site for general information• Spotlight articles featuring projects and progress• Elevator posters for bite-size news flashes• Leadership Talking Points for management messaging
We offer:
• One-on-one stakeholder interviews with employees• Huddles for employee-executive exchange• Advisory Groups for input from area representatives• Customized facilitated sessions on management
request
OCM Listens OCM RespondsEmployees need to feel ready
Employees need to be equipped
We assess:
• Ongoing employee readiness metrics• Go-live employee readiness for quality gate input• Themes and recommendations for management
We design and create:
• Acronyms Glossary• Employee job aids• Guide for employee-manager job role change
discussions
Employees need to feel supported We design and create:
• Acronyms Glossary• Employee job aids• Guide for employee-manager job role change
discussions
TEAM ProgramIndependent Program AssessmentBoard Presentation
December 2016
Objectives
Independent Program Assessment (IPA) Provide independent reporting and oversight to the TRS Board and Executive Director, or designee, regarding critical risks related to the TRS Enterprise Application Modernization (TEAM) Program to enable informed decision making
Critical Risks Focus:– Scope: requirements not adequately defined– Quality: significant defects in code development – Schedule: program substantially delayed– Cost: program substantially over budget
2
IPA Focus Summary
• Continue ongoing independent program assessment activities
• Continue collaboratively working with TRS PMO group, Provaliant and HPE while maintaining objectivity
• Advised and assisted implementing TEAM Transparency Reporting with objective of improved governance, project management and execution
• Current TEAM critical success factors– Finalize HPE contract negotiations including required deliverables– Complete HPE and TRS baselined detailed project schedules
3
Transparency Report Key Messages• Project Schedules: Set static baseline dates, including Healthcare and CRM
Workflows, to manage resource needs, interdependencies and critical path
• Requirements Gathering: Apply business process oriented approach with strict adherence by all stakeholders’ approval before accepting artifacts and test cases
• Development & Testing: Measure defects and resolution closure for quality scoring
• Cost: Continue tracking cumulative budget versus actual reporting and contingency usage
• Measure the above with quantitative (90%) and qualitative (10%) scoring
4
IPA Financial Summary Status
5
Through October 31, 2016Total Hours Incurred 5,390
Total Calculated Cost Incurred $948,775Total Billings $954,480Variance ($5,705)
Total Additional Advisory Billings $13,920
Joint Interim Committeeto study TRS Health Benefit
Plans
Joint Interim Committee to Study TRS Health Benefit Plans
Legislative joint interim committee to study TRS-Care and ActiveCare:
– Created by SB 1940 and HB 2974.
– Composed of 3 Senators and 3 State Representatives.
– Report findings and recommendations due January, 15, 2017.
– Focus of the study is to examine and assess:• the financial soundness of the plans;
• the cost and affordability of plan coverage; and
• the sufficiency of access to physicians and health care providers under the plan.
2
TRS-CARE
3
Committee Report: TRS-Care
Challenges for TRS-Care:– Long-term funding based on percentages of active employee payroll
and not health care costs for retirees.
– The shortfall next biennium projected to be from $1.3 to $1.5 billion.
– The following biennium shortfall is expected to range from $4 to $6 billion.
– The current structure for TRS-Care is not sustainable.
– Long-term solutions must be pursued immediately. Major plan design and/or funding changes must be sought in the 85th Legislative Session.
4
Committee Report: TRS-Care
Other issues for TRS-Care:
– Approximately 20,000 new retirees are added to the plan each year.
– Non-Medicare retirees cost up to four times more than the cost of Medicare-eligible participants.
– In fact, in FY 2015, each non-Medicare eligible participant in TRS-Care 3 cost the plan $13,640 versus $2,855 for a retiree enrolled in Medicare Advantage and Medicare Part D plans.
– Changes to non-Medicare retirees’ coverage must be made to keep the plan sustainable for all retirees.
5
Committee Report: TRS-Care
Two plan options to improve TRS-Care solvency: – Assume current funding levels by state, school districts and active
employees.
– Eliminates a no-cost plan option for retirees.
– Provide that Medicare-eligible retirees (both A & B, and B only retirees) and their Medicare eligible dependents would be eligible to enroll in Medicare Advantage plan and Medicare Part D plan. This would be the only plan available to Medicare-eligible participants through TRS-Care.
– The Medicare Advantage/Medicare Part D plan would be similar to current TRS-Care Medicare Advantage 2 level plan.
6
Committee Report: TRS-Care
Two plan options to provide sufficient access:
– TRS would ensure accommodations are made so that retirees have sufficient access to providers, especially for those located in rural areas.
– The Committee recognized that the Medicare Advantage plan may result in limited access to some providers in certain areas around the state; however, the Legislature would direct TRS to develop a policy to ensure retirees have sufficient provider access by offering alternative providers in those areas.
7
Committee Report: “HRA Plan”
Health Reimbursement Account (“HRA Plan”) for non-Medicare retirees:
– HRA Plan would provide a defined contribution plan for non-Medicare eligible retirees.
– This plan would be implemented 1/1/2018. Plan benefits would be aligned with the calendar year.
– Beginning 1/1/2018 retiree premiums would be restructured varying by coverage tier (retiree only, retiree dependents, etc.) and Medicare status of the retiree.
– A non-Medicare eligible retiree would use HRA to shop on the public exchange and choose a health care plan to serve his or her needs.
– Currently, a retiree can purchase health care coverage similar to that of the TRS-Care 2 plan for approximately $575-850 per month.
8
Committee Report: “HRA Plan”
1 2017 Maximum Out-of-Pocket limits for in-network benefits; maximum Out-of-Pocket limits for out-of-network benefitsare not regulated by the federal government and can be set by the plan.
2 Gross premiums less $275.82 State/District/Active Employee average contribution per retiree per month.
9
Committee Report: “HRA Plan”
HRA Plan Projection: Retiree premium contributions at CY2018 Illustrative Premiums
10
Committee Report: “HD Plan”
High Deductible Plan (“HD Plan”) for non-Medicare retirees:
– The HD Plan would provide a high deductible health plan for non-Medicare eligible participants.
– This plan would be implemented 1/1/2018. Plan benefits would be aligned with the calendar year.
– Beginning 1/1/2018 retiree premiums would be restructured varying by coverage tier and Medicare status of the retiree.
– Under this plan, non-Medicare eligible members would be eligible to enroll in a high deductible health care plan similar to the TRS-Care 1 level plan.
11
Committee Report: “HD Plan”
1 2017 Maximum Out-of-Pocket limits for in-network benefits; maximum Out-of-Pocket limits for out-of-network benefitsare not regulated by the federal government and can be set by the plan.
2 Gross premiums less $275.82 State/District/Active Employee average contribution per retiree per month.
12
Committee Report: “HD Plan”
HD Plan Projection: Retiree premium contributions at CY2018 Illustrative Premiums
13
Committee Report: TRS-Care
Conclusion– No simple answers to addressing the health care funding shortage for
TRS-Care in the next biennium and beyond.
– It is clear that drastic funding and/or benefit changes must occur to ensure the TRS-Care plan is sustainable long-term.
– If drastic measures are not taken during the 85th Legislative Session, the TRS Board of Trustees (the "Board") would have limited flexibility in providing a new plan design to continue any type of health care plan.
– The Board would be forced to increase retiree premiums to account for the projected $1.3 to $1.5 billion shortfall.
14
Committee Report: TRS-Care
Conclusion:– If no legislation and no new funding, the estimated shortfall would be fully borne by the retirees. – In order to mitigate costs, the TRS Board would be required to increase premiums in TRS-Care 2,
TRS-Care 3, Medicare Advantage 2, Medicare Advantage 3, and for TRS-Care 1 spousal and dependent premiums.
– The Board would also be forced to administer a combination of increased copayments, deductibles, and out-of-pocket expenses for all plan levels.
– Since premiums would be increased dramatically, many participants would likely decrease coverage to TRS-Care 1.
• Projected cost of coverage for all retirees in TRS-Care 1 would be approximately $1.08 billion in FY 2018. • Additionally, this migration to the TRS-Care 1 plan would create a significant loss of premium revenue, which
would cause further increases in premiums all other TRS-Care plans.
– Under this scenario, where no significant funding and/or benefit changes occur, funding for TRS-Care would be inadequate to pay claims and sustain the plan through the 2018-2019 biennium. Thus, the Board would likely be obligated to close the TRS-Care plan and begin to phase out current participants.
15
TRS-ActiveCare
16
Committee Report: TRS-ActiveCare
Challenges for TRS-ActiveCare:
– Because of the dramatic increase in health care costs, employees have been forced to pay more for health care coverage.
– Over time, assuming the minimum district contribution, the employee's share of the premium has more than doubled since the inception.
– Funding formulas have remained the same since 2001.
– As premiums for TRS-ActiveCare have increased, if the district did not absorb some or all the increase, the effective increase on employees has been more significant than the flat percentage increase in total premiums.
17
Committee Report: TRS-ActiveCare
Option to improve TRS-ActiveCare affordability:
– Offer a single high-deductible health plan (TRS-ActiveCare 1-HD) for school districts and certain entities with 1,000 or fewer employees.
– This would be the only plan available. ActiveCare 2, ActiveCare Select, and HMO plans would no longer be offered.
– School districts and certain entities with more than 1,000 employees would not have the option to join and be responsible for their own plan.
– One single opt-out provision for eligible entities with no provision to opt-in at a later time.
18
Committee Report: “HD Plan”
“TRS-ActiveCare 1-HD”– Single plan option available to active employees and their families of
participating entities.
– Funding for the plan would maintain the $75 per month per employee from the state and the minimum of $150 per month per employee from the district.
– Network of medical providers limited to value-based purchasing models, such as Accountable Care Organizations where available. Broader network in the remainder of the state to allow sufficient choices for providers, especially for those located in rural areas.
– Network of pharmacies includes all pharmacies in the existing broad network.
19
Committee Report: “HD Plan”
“TRS-ActiveCare 1-HD” Illustrative Plan
20
Committee Report: “HD Plan”
21
Committee Report: TRS-ActiveCare
Regional Rating:– The Committee also reviewed establishing premiums based on age and/or
geographic location. Under current law, TRS-ActiveCare is required to offer uniform statewide coverage.
– As a result of uniform rating, employees who reside in lower cost geographic areas are subsidizing those in higher cost areas. TRS found there is a 92% cost differential between the highest cost area and the lowest cost.
– Establishing regional rating methods to determine premiums would significantly increase premiums in certain areas of the state while lowering them in other areas.
– Attempting to establish premiums based on age and/or geographic location would not achieve plan affordability for all members.
22
Committee Report: TRS-ActiveCare
Conclusion:– The focus on TRS-ActiveCare is on funding and plan design options that are
affordable to employees.
– Affordability will continue to plague the plan as health care costs continue to rise.
– Providing quality, affordable health care plays a vital role in attracting and retaining highly qualified teachers. It is critical that the affordability issues of TRS-ActiveCare be addressed to ensure Texas is able to hire and retain the most qualified educators.
– Without significant changes, TRS-ActiveCare will eventually become unaffordable for active employees because premiums would become too excessive.
23
PRESENTATION TITLE >>> NAME FEB-09-15
Executive Director’s Report, Brian Guthrie December 1-2, 2016
• General Updates
• Update on 2016 top work place results
• Upcoming Agendas
2
General Updates
3
General Updates
• Update on NASRA Executive Committee – October 27-30, Portland, Maine.
• Update on Private/Public SPN Summit – November 2-3, Austin.
• NCTR Fall Executive Committee Meeting – December 9-11, Tucson, Arizona.
• November 14th was the first day to file bills for the 85th Legislature Regular Session
• Retirements :
• Jennifer Downey, Executive, January 31, 2017;
• Tom Guerin, Benefit Service, January 31, 2017.
4
TRS Top Work Place
5
TRS Top Workplace
• For the 5th consecutive year TRS is ranked as one of the top places to work by Workplacedynamics.
• The evaluation is based upon employees’ opinions of the employer.
• What our employees are saying about TRS:– “The positive environment and commitment of team members.”
– “I have great co-workers who share my enthusiasm to provide great service to our members and employees of TRS.”
– “The people here care about the people we service and our fellow employees.”
– “I get to do what I love while serving a higher purpose.”
6
Upcoming Agendas
7
February 22-24, 2017
February 22-24, 2017 Major items include(Three day education retreat in Austin):
o Team Updateo Cybersecurity – open/closed sessiono Pension Plan Management Policyo 403(b) o Departmental Overviews and Collaboration
o Overall philosophy of Audit/Compliance/ERMo Records Management Kickoff
o Educational Presentations and Trainingso Governance – Constitution/Statute/Bylaws/Delegationo Global and North American Pensions Trendso Agency Successiono Workforce generational mix
o Investment Presentations o Active versus Passive Investmentso Emerging Manager Updateo SPN Reporto Proxy Voting Policy o Funston Governance Report
o Facility Update
8
April 6-7, 2017
• TEAM Update
• Legislative Update
• Fourth Quarter Performance Review
• Committee Meetings
Investment Management Committee
Policy Committee
Risk Management Committee
Audit Committee
9
Aon HewittRetirement and Investment
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
Teacher Retirement System of Texas
Performance Review: Third Quarter 2016
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Summary
Global asset markets produced positive returns for the third quarter primarily lead by strong global equity performance
The TRS investment portfolio returned 3.9% for the quarter and outperformed its performance benchmark by 0.3 percentage points
– The largest contributors to relative results were U.S. Equity, Directional Hedge Funds, Real Assets, and an underweight position to Long Treasuries
For the trailing twelve months, TRS returned 9.5%, underperforming its performance benchmark by 0.3 percentage points
– The main detractors were poor relative performance by active Global Equity managers and an overweight allocation to Other Absolute Return Strategies
5.3%
0.2%2.1%
2.9%
9.8% 9.4%7.9%
12.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Global Equity Policy Benchmark Stable Value Policy Benchmark Real Return Policy Benchmark Risk Parity Benchmark
Third Quarter One-Year
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1. Market Summary – Third Quarter 2016
Third Quarter
Year to Date One Year
Three Years Five Years Ten Years
Global Equity:
MSCI U.S.A. IMI Index 4.4% 8.3% 15.2% 10.5% 16.4% 7.6%
MSCI EAFE + Canada Index 6.3 3.1 7.2 0.3 6.9 1.9
MSCI Emerging Markets Index 9.0 16.0 16.8 -0.6 3.0 3.9
HFRI Fund of Funds Composite Index 2.4 -0.3 0.5 2.2 3.2 1.8
State Street Private Equity Index (qtr lagged) 2.7 4.5 3.1 10.1 8.9 8.9
Global Equity Policy Benchmark 5.3 6.8 9.8 5.5 9.5 --
Stable Value:
Barclays Long Treasury Index -0.4% 14.7% 13.1% 11.2% 5.5% 8.1%
HFRI Fund of Funds Conservative Index 1.9 0.3 0.3 2.2 3.1 1.5
3 Month LIBOR + 2% 0.7 2.0 2.7 2.4 2.4 3.3
90 Day U.S. Treasury Bill 0.1 0.2 0.3 0.1 0.1 0.9
Stable Value Policy Benchmark 0.2 10.5 9.4 8.5 4.8 --
Real Return:
Barclays U.S. TIPS Index 1.0% 7.3% 6.6% 2.4% 1.9% 4.5%
NCREIF ODCE (qtr lagged) 1.9 7.1 10.8 12.0 11.7 --
Cambridge Nat. Resources (75) / CPI (qtr lagged) (25) 6.0 -4.4 -10.2 -6.5 -- --
Goldman Sachs Commodities Index -4.2 5.3 -12.2 -22.2 -12.6 -9.0
Real Return Policy Benchmark 2.1 6.2 7.9 7.8 8.5 --
Risk Parity:
Risk Parity Benchmark 2.9 14.1 12.3 3.5 -- --
TRS Policy Benchmark 3.7% 7.9% 9.8% 6.7% 8.6% 5.7%
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2. Market Value Change
$129,400.9
-$1,252.5
$5,072.4
$133,220.8
(20,000.0)
-
20,000.0
40,000.0
60,000.0
80,000.0
100,000.0
120,000.0
140,000.0
Beginning Market Value Net Additions / Withdrawals Investment Earnings Ending Market Value
Mill
ions
($)
Change in Market Value ( $Millions )From July 1, 2016 To September 30, 2016
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3. Asset Allocation Detail
Note: Asset allocation information shown above is based upon PureView reporting.
Market Value ($ in millions)as of 9/30/2016
InterimPolicyTarget
RelativeAllocation
toInterimPolicy Target
Long TermPolicy Target
Long TermPolicy
Ranges($) (%)
Total Fund $133,221 100% -- 100% --
Total U.S.A. $24,662 18.5% 18.9% -0.4% 18% 13-23%
Non-U.S. Developed $19,057 14.3% 13.9% +0.4% 13% 8-18%
Emerging Markets $13,707 10.3% 9.8% +0.5% 9% 4-14%
Directional Hedge Funds $5,200 3.9% 4.1% -0.2% 4% 0-10%
Private Equity $15,878 11.9% 12.0% -0.1% 13% 8-18%
Global Equity $78,505 58.9% 58.7% +0.2% 57% 50-64%
Long Treasuries $12,939 9.7% 11.9% -2.2% 11% 0-20%
Stable Value Hedge Funds $5,550 4.2% 4.0% +0.2% 4% 0-10%
Absolute Return (including OAR) $2,335 1.8% 0.0% +1.8% 0% 0-20%
Cash $1,110 0.8% 1.0% -0.2% 1% 0-5%
Stable Value $22,184 16.7% 16.9% -0.5% 16% 11-21%
TIPS $4,422 3.3% 3.9% -0.6% 3% 0-10%
Real Assets $16,773 12.6% 14.2% -1.6% 16% 7-17%
Energy, Natural Resource and Infrastructure $4,419 3.3% 1.9% +1.4% 3% 0-7%
Commodities $270 0.2% 0.0% +0.2% 0% 0-5%
Real Return $25,884 19.4% 20.0% -0.6% 22% 17-27%
Risk Parity $6,899 5.2% 4.3% +0.9% 5% 0-10%
Risk Parity $6,899 5.2% 4.3% +0.9% 5% 0-5%
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4. Total TRS Performance Ending 9/30/2016
Note: The excess returns shown above may not be a perfect difference between the actual and benchmark returns due entirely to rounding.
3.9%
7.7%
9.5%
6.9%
9.2%
5.9%
8.6%
3.7%
7.9%
9.8%
6.7%
8.6%
5.7%
8.1%
0.3%
-0.1% -0.3%
0.2% 0.6%0.2%
0.5%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
11.0%
Quarter Year to Date 1-Year 3-Years 5-Years 10-Years Since Inception(7/1/91)
Investment ResultsAs of 9/30/2016
Total Fund Policy Index Difference
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5. Total Fund Attribution - Quarter Ending 9/30/2016
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5. Total Fund Attribution – Trailing One Year Ending 9/30/2016
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6. Risk Profile: Total Fund Risk-Return vs. Peers
Plan Sponsor Peer Group composed of 24 public funds with total assets in excess of $10B as of 9/30/2016. An analytic outlining the asset allocation of the peer portfolios has been included in the appendix of this report.
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6. Risk Profile: Trailing 3-Year and 5-Year Risk Metrics Peer Comparison
Plan Sponsor Peer Group composed of 24 public funds with total assets in excess of $10B as of 9/30/2016. An analytic outlining the asset allocation of the peer portfolios has been included in the appendix of this report.
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7. Global Equity: Performance Summary Ending 9/30/2016
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Third Quarter Year to Date One Year Three Years Five Years
Total Global Equity 5.4% 6.2% 9.0% 5.8% 10.2%Global Equity Benchmark 5.3 6.8 9.8 5.5 9.5Difference +0.1 -0.6 -0.8 +0.3 +0.7Total U.S. Equity 4.9 6.6 12.6 8.2 15.1Total U.S. Equity Benchmark 4.4 8.3 15.2 10.7 16.4Difference +0.5 -1.7 -2.6 -2.5 -1.3Non-U.S. Equity 7.5 6.9 10.2 1.3 6.3Non-U.S. Benchmark 7.4 8.4 11.2 0.1 5.4Difference +0.1 -1.5 -1.0 +1.2 +0.9Non-U.S. Developed 6.4 0.5 4.8 2.0 8.0MSCI EAFE + Canada 6.3 3.1 7.2 0.3 6.9Difference +0.1 -2.6 -2.4 +1.7 +1.1
Emerging Markets 9.0 16.7 18.3 0.3 4.2MSCI Emerging Markets 9.0 16.0 16.8 -0.6 3.0
Difference +0.0 +0.7 +1.5 +0.9 +1.2
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7. Global Equity: Performance Summary Ending 9/30/2016 (cont’d)
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Third Quarter Year to Date One Year Three Years Five Years
Directional Hedge Funds 4.2% 1.2% -0.2% 1.9% --
HFRI Fund of Funds Composite Index 2.4 -0.3 0.5 2.2 --
Difference +1.8 +1.5 -0.7 -0.3 --
Total Public Equity 6.1 6.4 10.3 4.3 9.7
Public Equity Benchmark 5.8 7.6 11.8 4.5 9.6
Difference +0.3 -1.2 -1.5 -0.2 +0.1
Total Private Equity 2.7 5.4 3.6 12.6 12.5
Private Equity Benchmark 3.2 5.0 3.2 10.1 8.9
Difference -0.5 +0.4 +0.4 +2.5 +3.6
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8. Stable Value: Performance Summary Ending 9/30/2016
Note: Performance of Cash Equivalents is shown net of fees paid to TRS Strategic Partners
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Third Quarter Year to Date One Year Three Years Five Years
Total Stable Value 0.5% 11.8% 11.2% 10.4% 6.4%
Total Stable Value Benchmark 0.2 10.5 9.4 8.5 4.8
Difference +0.3 +1.3 +1.8 +1.9 +1.6
Long Treasuries -0.4 16.7 15.1 12.3 6.3
Treasury Benchmark -0.4 14.7 13.1 11.2 5.5
Difference +0.0 +2.0 +2.0 +1.1 +0.8
Stable Value Hedge Funds 1.7 2.3 3.1 5.0 3.9
Hedge Funds Benchmark 1.9 0.3 0.3 2.2 3.1
Difference -0.2 +2.0 +2.8 +2.8 +0.8
Other Absolute Return 2.6 9.1 8.9 14.8 14.4
Other Absolute Return Benchmark 0.7 2.0 2.7 2.4 2.4
Difference +1.9 +7.1 +6.2 +12.4 +12.0
Cash Equivalents 0.2 0.4 0.5 2.8 2.2
Cash Benchmark 0.1 0.2 0.3 0.1 0.1
Difference +0.1 +0.2 +0.2 +2.7 +2.1
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9. Real Return: Performance Summary Ending 9/30/2016
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Third Quarter Year to Date One Year Three Years Five Years
Total Real Return 2.4% 7.1% 7.5% 8.0% 8.3%
Real Return Benchmark 2.1 6.2 7.9 7.8 8.5
Difference +0.3 +0.9 -0.4 +0.2 -0.2
TIPS 1.0 7.5 6.8 2.5 2.0
U.S. TIPS Benchmark 1.0 7.3 6.6 2.4 1.9
Difference +0.0 +0.2 +0.2 +0.1 +0.1
Real Assets 2.4 8.0 10.4 12.5 12.9
Real Asset Benchmark 1.9 7.1 10.8 12.0 11.7
Difference +0.5 +0.9 -0.4 +0.5 +1.2
Energy, Natural Resource and Infrastructure 5.9 -3.1 -12.1 -4.3 --
Energy and Natural Resources Benchmark 6.0 -4.4 -10.2 -6.5 --
Difference -0.1 +1.3 -1.9 +2.2 --
Commodities 1.9 72.2 68.0 -13.0 -14.6
Commodities Benchmark -4.2 5.3 -12.2 -22.2 -12.6
Difference +6.1 +66.9 +80.2 +9.2 -2.0
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10. Risk Parity: Performance Summary Ending 9/30/2016
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Third Quarter Year to Date One Year Three Years Five Years
Total Risk Parity 3.4% 15.1% 13.8% 5.5% --
Risk Parity Benchmark 2.9 14.1 12.3 3.5 --
Difference +0.5 +1.0 +1.5 +2.0 --
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Appendix – Supplemental Reporting
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TRS Commitment Levels vs. Peers (>$10 Billion)
The chart above depicts the asset allocation of peer public funds with assets greater than $10 billion.- The ends of each line represent the 95th and 5th percentile of exposures, the middle light blue and grey lines represent the
25th and 75th percentile of exposures, and the green dot represents TRS exposure.
69.7%66.5%
36.0%
14.6%9.7%
56.9%
30.1%
23.8%
9.6% 4.7%
37.1%
15.8% 13.3%
4.5%1.0%
21.2%
10.7%6.7%
2.3% 1.5%
43.1%
19.0%24.5%
12.6%
0.8% 0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Global Equity Total Fixed Income Alternative Investments Real Estate Cash
95th 75th 25th 5th Percentile TRS
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Historical Excess Performance Ending 9/30/2016
Quarterly and Cumulative Excess Performance
Total Fund vs. Total Fund Benchmark
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TRS Asset Growth
0
20
40
60
80
100
120
140
160
Mar
ket V
alue
(Billi
ons)
Total Fund Historical Growth (September 1997 - Septmeber 2016)
$133.2
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External Manager Program: Public Equity Performance as of 9/30/2016
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Allocation ($ in billions)
ThirdQuarter Year to Date One
YearThree Years
EP Total Global Equity $31.5 6.9% 7.8% 11.0% 3.8%EP Global Equity Benchmark -- 5.8 7.7 11.3 4.2Difference -- +1.1 +0.1 -0.3 -0.4EP U.S.A. $6.2 5.4 9.6 14.8 7.7EP U.S.A. Benchmark -- 4.4 8.3 15.2 10.5Difference -- +1.0 +1.3 -0.4 -2.8EP Non-U.S. Developed $5.6 7.4 1.4 6.5 2.5MSCI EAFE + Canada Index -- 6.3 3.1 7.2 0.3Difference -- +1.1 -1.7 -0.7 +2.2EP Emerging Markets $8.4 9.3 17.4 18.7 0.0MSCI Emerging Markets Index -- 9.0 16.0 16.8 -0.6Difference -- +0.3 +1.4 +1.9 +0.6EP World Equity $6.1 6.8 5.3 11.1 4.7EP World Equity Benchmark -- 5.4 6.9 12.3 5.4Difference -- +1.4 -1.6 -1.2 -0.7EP Directional Hedge Funds $5.2 4.2 1.2 -0.2 2.1HFRI Fund of Funds Composite Index -- 2.4 -0.3 0.5 2.2Difference -- +1.8 +1.5 -0.7 -0.1
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External Manager Program: Stable Value/Total Program Performance as of 9/30/2016
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Allocation ($ in billions)
ThirdQuarter Year to Date One
YearThree Years
EP Total Stable Value $5.7 1.7% 2.6% 3.4% 5.7%
EP Stable Value Benchmark -- 1.9 0.4 0.4 2.2
Difference -- -0.2 +2.2 +3.0 +3.5
EP Stable Value Hedge Funds $5.6 1.7 2.3 3.1 5.0
EP Stable Value Hedge Funds Benchmark -- 1.9 0.3 0.3 2.2
Difference -- -0.2 +2.0 +2.8 +2.8
EP Absolute Return $0.1 3.2 14.5 16.0 23.6
EP Absolute Return Benchmark -- 0.7 2.0 2.7 2.4
Difference -- +2.5 +12.5 +13.3 +21.2
Total External Public Program $37.2 6.0 6.9 9.7 4.0
EP External Public Benchmark -- 5.2 6.5 9.5 3.9
Difference -- +0.8 +0.4 +0.2 +0.1
Aon Hewitt | Retirement and InvestmentProprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 22
Public Strategic Partnership Program (SPN): Performance Summary as of 9/30/2016
The Public SPNs in aggregate outperformed the benchmark during the third quarter but have underperformned during the trailing one and three-year period
– Two of the managers, BlackRock and J.P. Morgan have 3-year returns above the benchmark while Neuberger Berman and Morgan Stanley trail the benchmark.
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material. Returns are shown on a before-fees basis.
Allocation ($ in billions)
ThirdQuarter Year to Date One
YearThree Years
Public Strategic Partnership $6.8 4.3% 8.5% 11.3% 5.9%Public SPN Benchmark -- 4.0 9.6 12.6 6.0
Difference -- +0.3 -1.1 -1.3 -0.1
Blackrock $1.7 4.5% 8.9% 12.2% 7.3%J.P. Morgan $1.8 4.1% 9.1% 11.5% 6.4%Neuberger Berman $1.7 4.5% 8.5% 11.9% 4.8%Morgan Stanley $1.7 4.0% 7.7% 9.5% 4.8%
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Benchmarks
Total Fund Performance Benchmark – 18.1% MSCI U.S.A. IMI, 10.2% MSCI Emerging Markets, 13.9% MSCI EAFE plus Canada, 4.1% HFRI FoF Composite Index, 12.0% State Street Private Equity (1 qtr lagged), 11.9% BC Long Term Treasury, 4.0% HFRI FoF Conservative Index, 1.0% Citigroup 3 Mo T-Bill, 3.9% BC U.S. TIPS, 14.2% NCREIF ODCE (1 qtr lagged), 1.9% Energy and Natural Resources Benchmark, and 4.3% Risk Parity Benchmark.
Global Equity Benchmark– 23.7% MSCI EAFE plus Canada, 32.2% MSCI U.S.A. IMI,16.7% MSCI Emerging markets index, 7.0% HFRI FoF Composite Index, and 20.4% State Street Private Equity (1 qtr lagged)
– U.S, Equity Benchmark - MSCI U.S.A. IMI Index– Emerging Markets Equity Benchmark – MSCI Emerging Markets – Non-US Developed Equity Benchmark– MSCI EAFE plus Canada– Directional Hedge Funds – HFRI Fund of Funds (FoF) Composite Index– Private Equity Benchmark - State Street Private Equity (1 qtr lagged)
Note: Returns and market values (based on account level) reported are provided by State Street. Net additions/withdrawals are reported on a gross (adjusted for expenses) total fund level as provided by State Street. All rates of return for time periods greater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Aon Hewitt | Retirement and InvestmentProprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 24
Benchmarks (cont’d)
Stable Value Benchmark – 23.6% HFRI FoF Conservative Index, 70.5% Barclays Long Term Treasury, and 5.9% Citigroup 3 mo T-Bill.
– US Treasuries Benchmark – Barclays Long Term Treasury– Stable Value Hedge Funds – HFRI Fund of Funds (FoF) Conservative Index– Other Absolute Return Benchmark - 3 Mo LIBOR + 2%– Cash Benchmark - Citigroup 3 Mo T-Bill
Real Return Benchmark – 19.6% Barclays U.S. TIPS, 71.0% NCREIF ODCE, and 9.5% Energy & Natural Resources Benchmark
– US TIPS Benchmark – Barclays U.S. TIPS Index– Real Assets Benchmark – NCREIF ODCE (1qtr lagged) – Energy and Natural Resources – 75% Cambridge Associates Natural Resources (reweighted) /
25% quarterly Seasonally-Adjusted Consumer Price Index (1qtr lagged) – Commodities Benchmark – Goldman Sachs Commodity Index
Note: Returns and market values (based on account level) reported are provided by State Street. Net additions/withdrawals are reported on a gross (adjusted for expenses) total fund level as provided by State Street. All rates of return for time periods greater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Aon Hewitt | Retirement and InvestmentProprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 25
Description of Performance Attribution
A measure of the source of the deviation of a fund's performance from that of its policy benchmark. Each bar on the attribution graph represents the contribution made by the asset class to the total difference in performance. A positive value for a component indicates a positive contribution to the aggregate relative performance. A negative value indicates a detrimental impact. The magnitude of each component's contribution is a function of (1) the performance of the component relative to its benchmark, and (2) the weight (beginning of period) of the component in the aggregate.
The individual Asset Class effect, also called Selection Effect, is calculated as Actual Weight of Asset Class x (Actual Asset Class Return – Asset Class Benchmark Return)
The bar labeled Allocation Effect illustrates the effect that a Total Fund's asset allocation has on its relative performance. Allocation Effect calculation = (Asset Class Benchmark Return –Total Benchmark Return) x (Actual Weight of Asset Class – Target Policy Weight of Asset Class).
The bar labeled Other is a combination of Cash Flow Effect and Benchmark Effect:– Cash Flow Effect describes the impact of asset movements on the Total Fund results. Cash Flow
Effect calculation = (Total Fund Actual Return – Total Fund Policy Return) – Current Selection Effect – Current Allocation Effect
– Benchmark Effect results from the weighted average return of the asset classes' benchmarks being different from the Total Funds’ policy benchmark return. Benchmark Effect calculation = Total Fund Policy Return – (Asset Class Benchmark Return x Target Policy Weight of Asset Class)
Cumulative EffectCumulative Effect calculation = Current Effect t *(1+Cumulative Total Fund Actual Return t-1) +Cumulative Effect t-1*(1+Total Fund Benchmark Return t)
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Disclaimers and Notes
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Disclaimers and NotesAs of September 30, 2016
Disclaimers: Please review this report and notify Aon Hewitt Investment Consulting (AHIC) with any issues or
questions you may have with respect to investment performance or any other matter set forth herein. The client portfolio data presented in this report have been obtained from the custodian. AHIC has
compared this information to the investment managers’ reported returns and believes the information to be accurate. AHIC has not conducted additional audits and cannot warrant its accuracy or completeness.
The mutual fund information found in this report is provided by Lipper Inc. and AHIC cannot warrant its accuracy or timeliness.
Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.
Notes: The rates of return contained in this report are shown on an after-fees basis unless otherwise noted.
They are geometric and time weighted. Returns for periods longer than one year are annualized. Universe percentiles are based upon an ordering system in which 1 is the best ranking and 100 is the
worst ranking. Due to rounding throughout the report, percentage totals displayed may not sum up to 100.0%.
Additionally, individual fund totals in dollar terms may not sum up to the plan totals.
Teacher Retirement System of Texas
Comprehensive Annual Financial Report Fiscal Year 2016
Presenters
Jamie Pierce
Cindy Haley
Ann Zigmond
Scot Leith
2
3
Comprehensive Annual Financial Report FY 2016
Net Position - September 1, 2015 $ 128.5
Additions:
Member Contributions 2.9
State Contributions 3.1(As Non-employer Contributor $1.7B; as Employer $1.4B)
Investment Income 9.2
Other 0.1
Deductions:
Retirement Benefits and Other (9.4)
Refunds of Contributions and Admin. Exps. (0.4)
Net Position - August 31, 2016 $ 134.0
Administrative Cost per Member $29.53
Investment Cost per Member (in basis points 18.0) $157.92
Membership
Current Members (Average Age 44.5) 1,110,026
Retirees and Beneficiaries 393,914
Total Membership 1,503,940
Participating Employers 1,332
Teacher Retirement System of Texas
Financial Highlights
PENSION TRUST FUND(billions)
4
Comprehensive Annual Financial Report FY 2016
5
Comprehensive Annual Financial Report FY 2016
TRS-Care ActiveCare
Net Position - September 1, 2015 $ 972.9 $ 87.8
Additions:
Health Care Premiums 374.7 2,073.6
State Contributions 297.1
Member Contributions 208.6
212.9
Rebates and Discount Income 219.0
Federal Revenue 124.7
Investment Income/Other 5.5 3.4
Deductions:
Medical and Rx Claims (1,720.9) (1,768.3)
Claims Processing, Fees and
(53.0) (342.9)
Net Position - August 31, 2016 $ 641.5 $ 53.6
Membership (and dependents) 261,528 484,316
HEALTH BENEFIT PROGRAMS
Financial Highlights
Teacher Retirement System of Texas
Participating Employers and
Other Contributions
Admin. Expenses
(millions)
6
Comprehensive Annual Financial Report FY 2016
7
Comprehensive Annual Financial Report FY 2016
8
Investment related changes to the FY 2016 CAFR:
Implemented GASB standard number 72: Fair Value Measurement and Application
Modified Investment Manager Fee disclosure
Comprehensive Annual Financial Report FY 2016
9
GASB 72: Fair Value Measurement and Application:
• Effective 8/31/2016
• Months of research, planning and collaboration.
• Requires additional valuation oversight and CAFR disclosures including:
• More thorough review and confirmation of Investment Valuations.
• Fair Value Hierarchy broken out by valuation level.
• More detailed disclosures of significant Investment Strategies and redemption terms and restrictions.
Comprehensive Annual Financial Report FY 2016
10
Comprehensive Annual Financial Report FY 2016
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Other
Observable
Input
(Level 3)
Net Asset
Value
Per Share Total
Alternative Investments
Absolute Return -$ -$ -$ 180,056,761$ 180,056,761$
Directional Hedge Funds - - - 5,100,368,014 5,100,368,014
Domestic Private Equity - - - 10,246,807,262 10,246,807,262
Domestic Real Assets - - - 14,852,018,532 14,852,018,532
Energy and Natural Resources - - - 2,163,502,297 2,163,502,297
International Private Equity - - - 3,149,571,074 3,149,571,074
International Real Assets - - - 2,885,199,536 2,885,199,536
Other Private Market - - 707,215,045 - 707,215,045
Private Markets Strategic Partnerships - - - 3,836,638,277 3,836,638,277
Risk Parity - - - 3,471,459,388 3,471,459,388
Stable Value Hedge Funds - - - 5,527,592,769 5,527,592,769
Total Alternative Investments - - 707,215,045 51,413,213,911 52,120,428,956
Derivative Investments
Futures - - - - -
Forwards 4,624,554 - - - 4,624,554
Options 827,631 5,154,398 - - 5,982,029
Rights 697,854 487,644 - - 1,185,498
Swaps - 15,976,447 - - 15,976,447
Warrants 863,780 12,871,197 - - 13,734,977
Total Derivative Investments 7,013,820 34,489,686 - - 41,503,506
Equity Investments
Domestic Equity 21,289,355,958 - 3,918,737 - 21,293,274,695
International Equity 26,488,300,265 - 4,102,883 - 26,492,403,148
Total Equity Investments 47,777,656,223 - 8,021,620 - 47,785,677,843
Fixed Income Investments
Asset and Mortgage Backed Bonds - 157,236,825 - - 157,236,825
Domestic Corporate Bonds - 30,922,786 - - 30,922,786
Inflation Index Bonds - 5,169,585,378 - - 5,169,585,378
International Corporate Bonds - 7,312,109 - - 7,312,109
Sovereign Government Issue Bonds - 645,940,600 - - 645,940,600
U.S. Government Agency Bonds - 12,000,235 - - 12,000,235
U.S. Treasury Bonds 14,234,243,530 - - - 14,234,243,530
U.S. Treasury STRIPS - 226,386,152 - - 226,386,152
Total Fixed Income Investments 14,234,243,530 6,249,384,084 - - 20,483,627,614
Pooled Investments
Commingled Domestic Equity - - - 3,837,356,716 3,837,356,716
Commingled Fixed Income - - - 154,206,474 154,206,474
Commingled International Equity - - - 4,733,036,456 4,733,036,456
Domestic Mutual Funds - - - 285,070,598 285,070,598
International Mutual Funds - - - 94,083,357 94,083,357
Total Pooled Investments - - - 9,103,753,601 9,103,753,601
Short-Term Investments
Short-Term Investment Fund - - - 3,227,490,758 3,227,490,758
Short-Term Foreign Currency Contracts (14,948) - - - (14,948)
Total Short-Term Investments (14,948) - - 3,227,490,758 3,227,475,810
62,018,898,625$ 6,283,873,770$ 715,236,665$ 63,744,458,270$ 132,762,467,330$
Securities Lending
Invested Securities Lending Collateral* 5,191,993,000$ 12,926,876,745$ -$ -$ 18,118,869,745$
Total Securities Lending 5,191,993,000$ 12,926,876,745$ -$ -$ 18,118,869,745$
Securities Sold Short
Securities Sold Short (139,061,758)$ -$ -$ -$ (139,061,758)$
Total Securities Sold Short (139,061,758)$ -$ -$ -$ (139,061,758)$
* Excludes receivables and payables related to the Securities Lending Pool.
Fair Value
Total Investments
Investments
Investments by Fair Value Level and
Net Asset Value per Share
11
Modified Investment Manager Fee Disclosure:
• More fee information including paid performance fees and carried interest
• Breaks down fees by those paid directly from the Trust fund and those taken out of the NAV by the GP
• Shows fees by asset class and includes total MV of each asset class for reference
Comprehensive Annual Financial Report FY 2016
12
Assets Under
Management
Management
Fees
Performance
Fees
Management
Fees
Performance
Fees/Carried
Interest
Public Markets 9,103,753,601 75,955,817 63,467,563 25,915,855 30,407,155
Absolute Return 180,056,761$ -$ -$ 314,518$ 3,893,369$
Energy and Natural Resources 1,989,970,141 482,728 - 34,016,794 5,157,088
Hedge Funds 10,627,960,783 2,078,227 - 141,154,676 60,282,101
Private Equity 12,796,511,813 - - 136,969,810 206,605,030
Real Assets 17,737,218,068 900,782 - 152,767,681 100,464,277
Risk Parity 3,471,459,388 369,391 - 9,400,764 -
Private Markets Strategic Partnerships 4,610,036,956 - - 32,333,322 -
Total 60,516,967,511$ 79,786,945$ 63,467,563$ 532,873,420$ 406,809,020$
Fees Paid From the Pension Trust Fund* Fees Netted Against Returns**
Investment Manager FeesPENSION TRUST FUND
For the Fiscal Year Ended August 31, 2016
Comprehensive Annual Financial Report FY 2016
Teacher Retirement System of Texas
FY 2017 Budget Report
Don Green, Chief Financial Officer
Board of Trustees MeetingDecember 2016
TRS Financial Status as of 10/31/16 (17%)
2
13,049,596 , 73%
1,580,365 , 9%
2,358,250 , 13%
527,569 , 3%
276,007 , 2%
12,810 , 0%
Expenditures by Fund
Pension Fund TEAM Soft Dollars TRS Care ActiveCare 403 (b)Wages and
BenefitsProf Fees& Services
SupportCosts
TravelCapital
ProjectsOperating
Costs
Budgeted 88,480,962 28,596,801 6,577,439 1,745,460 6,470,069 33,399,480
Expended 11,826,398 629,895 733,321 211,439 - 4,403,544
-
20
40
60
80
100
Mill
ion
s
Expenditures by Category
503.3 503.3 503.3 503.3
479.59
489.26
498.48
460.0
470.0
480.0
490.0
500.0
510.0
FY2014 FY2015 FY2016 FY2017
FTE Cap Trend
FTE Cap Actual FTE
FY 2017 Budget by Fund
3
Pension, $130.9, 79%
Soft Dollars, $24.4 , 15%
Healthcare, $9.9, 6%
The total operating budget is $165,270,211 across all funds. Label amounts in millions.
Summary By Fund
4
Fund Budget Expended % Spent
Pension 107,925,983 13,049,597 12%
TEAM 22,945,217 1,580,365 7%
Soft Dollars 24,408,296 2,358,250 10%
Care 5,786,696 527,569 9%
ActiveCare 4,004,046 276,007 7%
403(b) 199,973 12,810 6%
Total 165,270,211 17,804,598 11%
FY 2017 Budget by Division
5
The Agency Support Division includes Executive, Human Resources, Communications, Internal Audit, Strategic Initiatives, Risk Management and Legal. Label amounts in millions.
Agency Support, $21.5,,13%
IMD, $65.9, 40%
Benefits, $11, 7%
Finance, $15.5, 9%
Info Tech, $18.5, 11%
TEAM, $22.9, 14%
Healthcare, $9.9, 6%
Summary By Category
6
Category Budget Expended % Spent
Wages/Benefits 88,480,962 11,826,398 13%
Pro Fees and Services 28,596,801 629,895 2%
Support Costs 6,577,439 733,321 11%
Travel 1,745,460 211,439 12%
Capital Projects 6,470,069 0 0%
Operating Costs 33,399,480 4,403,545 13%
Totals 165,270,211 17,804,598 11%
Capital Budget (non TEAM)
7
Item Budget Expended % Spent
Investment Systems 221,121 0 0%
PC Upgrades 371,838 0 0%
Telecom Upgrades 537,110 0 0%
Mainframe Upgrades 840,000 0 0%
Building Renovations 1,000,000 0 0%
Data Center Generator 600,000 0 0%
Garage Fire Suppression 1,500,000 0 0%
Sump Pump System 1,200,000 0 0%
Pension Legislation 200,000 0 0%
Total 6,470,069 0 0%
Significant Budget Issues
8
Two months into FY 2017, the lapse rate is approximately 5-6% of the budget.
Unfunded agency priorities including eRecords Management Project, IMD equity adjustments, unexpected audit costs and space planning work.
We expect to operate within existing budget authority as provided by the Board.
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