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B U D G E T C o m m i t t e e M e e t i n g

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T e a c h e r R e t i r e m e n t S y s t e m o f T e x a s1 0 0 0 R e d R i v e r S t r e e t A u s t i n , T e x a s 7 8 7 0 1 - 2 6 9 8

NOTE: The Board of Trustees (Board) of the Teacher Retirement System of Texas will not consider or act

upon any item before the Budget Committee (Committee) at this meeting of the Committee. This meeting is

not a regular meeting of the Board. However, because the full Committee constitutes a quorum of the Board,

the meeting of the Committee is also being posted as a meeting of the Board out of an abundance of caution.

TEACHER RETIREMENT SYSTEM OF TEXAS MEETING

BOARD OF TRUSTEES

AND

BUDGET COMMITTEE

(Committee Chair Nanette Sissney; Members David Corpus,

John Elliott, James Dick Nance)

By Videoconference

THE APRIL 14, 2020, MEETING OF THE TRS BUDGET COMMITTEE AND BOARD

OF TRUSTEES MEETING WILL BE CONDUCTED BY VIDEOCONFERENCE IN

ACCORDANCE WITH THE GOVERNOR’S AUTHORIZATION CONCERNING

SUSPENSION OF CERTAIN OPEN MEETING LAW REQUIREMENTS IN

RESPONSE TO THE COVID-19 (CORONAVIRUS) DISASTER. A quorum of members

of the Committee will participate in the meeting and will be audible to the public. Members

of the public may access the meeting by clicking https://zoom.us/j/984-348-8378 Meeting

ID: 984-348-8378, please email the Board Secretary to obtain the meeting password at

Katherine.Farrell@trs.texas.gov.

.

The open portions of the April 14, 2021, meeting are being broadcast over the Internet.

Access to the Internet broadcast and agenda materials of the meeting is provided at

www.trs.texas.gov. A recording of the meeting will be available at www.trs.texas.gov.

AGENDA

April 14, 2021 – 10:45 a.m.

1. Call roll of Committee members.

2. Consider the approval of the proposed minutes of the December 2020 committee

meeting – Committee Chair.

3. Receive an update on the administrative operations budget for fiscal year 2021

including FTE update – Don Green.

Minutes of the Budget Committee December 9, 2020 The Budget Committee of the Board of Trustees of the Teacher Retirement System of Texas met on December 9, 2020, by videoconference in accordance with the Governor’s authorization concerning suspension of certain Open Meeting law requirements in response to the COVID-19 (Coronavirus) disaster.

Committee Members who participated by videoconference: Ms. Nanette Sissney, Chair Mr. David Corpus Mr. John Elliott Mr. James D. Nance Other TRS Board Members present: Mr. Michael Ball Mr. Jarvis V. Hollingsworth Mr. Chris Moss Mr. Robert H. Walls Others present: Brian Guthrie, TRS Andrew Roth, TRS Don Green, TRS Heather Traeger, TRS Janie Duarte, TRS Ann Zigmond, TRS Scot Leith, TRS Sylvia Bell, TRS Amanda Jenami, TRS Katherine Farrell, TRS Shankar Subramanian, Cutter Associates Matt Connolly, Cutter Associates Suzanne Dugan, Cohen Milstein Budget Committee Chair Ms. Nanette Sissney called the meeting to order at 9:24 a.m. 1. Call roll of Committee members.

Ms. Farrell called the roll. A quorum was present.

2. Consider the approval of the proposed minutes of the July 2020 committee meeting –

Chair Nanette Sissney. On a motion by Mr. Corpus, seconded by Mr. Nance, the committee unanimously voted to approve the proposed minutes for the July 2020 Budget Committee meeting as presented.

3. Review the Comprehensive Annual Financial Report for fiscal year 2020 – Janie Duarte, Ann Zigmond and Scot Leith.

Mr. Janie Duarte provided an overview of the Comprehensive Annual Financial Report (CAFR) for fiscal year 2020. She thanked the executive leadership, various department staff and especially the accounting and analytics teams for their dedication and hard work in creating a report of this magnitude. She reported TRS received a clean opinion for the State Auditor’s Office with one carry-over finding related to employer census data. She noted the Pension Trust Fund membership increased three percent from last year to 1.682 million. Ms. Ann Zigmond presented the financial highlights. She reported the Pension Trust Fund had an ending net position of $155.4 billion and paid out retirement benefits of just over $11 billion last year. She said TRS-Care ended with a $1.9 billion net position, paying out over $1 billion in health care claims and ActiveCare ended the year at $168 million, paying out almost $2 billion in health care claims. Mr. Scot Leith reported that based on a Sunset recommendation, TRS included further information about alternative investments in its CAFR. He said within the investment section there is now a chart showing the ten, five and three year history of the growth of alternative assets over time. 4. Review fiscal year 2020 Year End – Don Green. Mr. Don Green provided highlights of the fiscal year 2020 budget, noting the agency spent $147.6 million, 86 percent of the amount that the Board authorized which was $172.3 million. He stated that the impact of the pandemic was being seen by the decrease in spending. He pointed out travel in particular was down, with only 35 percent of the total travel budget being spent. He noted only 69 percent of the administrative support budget was spent this fiscal year. He reported 16 percent of the operating budget was saved with $36 million lapsed. Mr. Green reported on full time employees (FTE) finishing the year with an average of 674.1, 70 to 80 positions below the FTE cap of 745.3. 5. Receive a report on the cost benefit analysis of implementing an enhanced Investment

Accounting System - Don Green, Scot Leith, Sylvia Bell, Amanda Jenami and Shankar Subramanian.

Mr. Green provided the background of how the project started. He noted Trustee Joe Colonnetta inquired as to the level of confidence in the investment accounting information TRS was getting from State Street, the custodian bank, and the confidence of the investment accounting data shared between Investment Operations and Investment Accounting. He said it was this inquiry that launched a joint effort in calendar year 2020 between Investment Accounting, Investment Operations and State Street Bank called project AIM, Align, Innovate and Manage. He said at the same time there was an audit on the Investment Accounting, presented to the Board in July 2020.

He noted one of the key recommendations in that audit was to analyze the cost benefit of a parallel accounting system. He also said the Sunset Commission recommended a cost benefit analysis of a parallel accounting system to be completed by December 1st. Mr. Scot Leith provided further information on Project AIM. He said it was a full review of 270 key accounting control activities performed at State Street Bank on TRS’ behalf. He said a full review of the 69 daily and monthly complementary internal controls performed by TRS was performed, and it coordinated formalization of the month-end accounting close process, activities that happen in State Street Bank, Investment Accounting and Investment Operations. Mr. Shankar Subramanian, principal at Cutter Associates, reported on the cost benefit analysis of the investment accounting they performed. He said as part of the process they also surveyed TRS’ peers, 10 pension funds that were comparable in size and level of investments, on their investment accounting processes and controls. He reported they found in terms of TRS’ own independent processes and controls, both Investment Accounting and Investment Operations have implemented and improved on processes and controls. He noted all of the high and medium-level risks in the perspective of controls and processes have been mitigated. He said there may be some minor, low-level risks that are still existing, but those were certainly acceptable. He reported TRS was in line with peers from the perspective of the processes, the controls, the validations, the reservation processes, and all things related to custodian oversight. Mr. Subramanian reported finding some scope for improvement in aspects of scalability. He said the current system was adequate and really good from the current mode of operations but if assets were to increase or transaction volume increase more staff would be needed. He stated three options were reviewed to address the scalability, agility and to improve upon the robustness of the current controls. The first option was a parallel vendor-based investment accounting system. The second was outsourcing some of the processes that are currently being performed internally and the last option was continuing current mode of development, enhancing the internal systems, implement targeted automation. After reviewing the cost benefits of the three options, he recommended option three as the least expensive. Mr. Green reported it was Staff’s intent to move forward with option three. He said this option would involve adding a couple of positions that have some expertise to enhance our program and add some minor software additions. Ms. Sylvia Bell from the Investment Operations perspective endorsed the selection of option three. In response to Mr. Hollingsworth’s inquiry, Mr. Green stated the time frame would be dependent upon when they can recruit individuals with accounting expertise in private equity, real estate and derivatives but are looking within the next year, to be done within fiscal year 2021. Ms. Amanda Jenami as the Chief Audit Executive stated Cutter performed a comprehensive analysis. She said option three seems to provide the scalability and agility to quickly reform to new investment strategies, asset types and other changes as recommended in the July internal audit. Without further discussion, the meeting adjourned at 10:35 a.m.

APPROVED BY THE BUDGET COMMITTEE OF THE BOARD OF TRUSTEES OF THE TEACHER RETIREMENT SYSTEM OF TEXAS ON THE 14th DAY OF APRIL 2021.

______________________________ _________________

Katherine H. Farrell Date Secretary of the TRS Board of Trustees

TAB 3

FY 2021 Midyear Budget & FTE Update

Don GreenChief Financial Officer

April 14, 2021

FY 2021 Operating Budget by Fund

2

Pension$170.1 , 72%

Commission Credits$25.5 , 11%

Healthcare$17.6 , 8%

Contingency $21.7 , 9%

Amount in millions

FY 2021 Total

Administrative

Operating Budget

$234,852,726

• Pension - $19.1• Commission Credits - $1.4• Healthcare - $1.2

3

Wages & Benefits$123.9 , 53%

Pro Fees & Services $37.3 , 16%

Support Costs $8.5 , 4%

Travel $0.8 , 0.3%

Operating Costs$40.8 , 17%

Capital Projects $1.8 , 1%

Contingency $21.7 , 9%

Amount in MillionsOperating costs: software, hardware, postage, printing, equipment, reference materials

Support costs: Rent, building/equipment maintenance, utilities, supplies

FY 2021 Operating Budget by Expense Category

FY 2021 Total

Administrative

Operating Budget

$ 234,852,726

• Wages & Benefits - $14.3• Pro Fees & Services - $2.4• Support Costs - $0.07• Travel - $1.5• Operating Costs - $3.3• Capital Projects - $0.09

4

Benefit Services$19.8 , 8%

Investment Management$81.8 , 35%

Health and Insurance Benefits$17.6 , 8%

Information Technology$48.4 , 21%

Finance$19.2 , 8%

Agency Support$26.3 , 11%

Contingency$21.7 , 9%

Amount in millionsAgency Support: Executive, Internal Audit, Legal & Compliance, Gov’t Relations, Diversity, Equity, and Inclusion, Organizational

Excellence, Strategy Office and Agency-wide

FY 2021 Operating Budget by Division

FY 2021 Total

Administrative

Operating Budget

$ 234,852,726

5

FY 2021 Expenditures

Budget Exp/Enc (as of Feb-2021)

ProjectedTotal Spend

% ProjectedTotal Spend

FundPension Trust Fund(Includes Fringe Benefits & Incentive Comp)

170,084,359 93,951,766 157,437,333 93%

Commission Credits 25,468,247 10,852,827 25,259,378 99%

TRS Care 13,579,418 6,431,429 13,260,730 98%

TRS ActiveCare 4,030,702 1,458,792 3,790,818 94%

Fund Total $ 213,162,726 $ 112,694,814 $ 199,748,259 94%

Expense Category

Wages & Benefits 123,915,339 59,446,737 117,675,294 95%

Pro Fees & Services 37,298,801 22,237,586 35,363,105 95%

Support Costs 8,581,100 8,004,884 7,916,623 92%

Travel 841,073 19,979 96,829 12%

Operating Costs 40,744,398 22,687,601 36,934,392 91%

Capital Projects 1,782,015 298,027 1,762,015 99%

Expense Category Total $ 213,162,726 $ 112,694,814 $ 199,748,258 94%

• FY21 reduced budget and expenditures reflect TRS’ efforts to reduce costs across all funds in response to the sharp economic downturn associated with COVID-19

6

FY 2021 ExpendituresBudget Exp/Enc

as of Feb-2021 Projected Total

Spend % Projected Total

SpendDivision

Benefit Services 19,755,740 8,631,590 19,526,975 99%Investment Management 81,824,824 42,439,899 76,761,856 94%Health and Insurance Benefits 17,610,120 7,890,221 17,051,547 97%Information Technology 40,244,090 26,379,455 38,638,346 96%Finance 15,190,294 9,542,217 14,607,351 96%Agency Support 26,351,857 12,364,335 20,976,382 80%

Division Total $ 200,976,925 $ 107,247,717 $ 187,562,457 93%

Capital ProjectsBuilding Renovations 2,889,550 187,500 2,889,550 100%Security Renovations 195,000 - 195,000 100%Data Center Upgrade 580,924 237,196 580,924 100%Investment System Modernization 465,198 - 465,198 100%Network Infrastructure 488,893 55,237 488,893 100%PC Workstation Refresh 508,661 - 508,661 100%Pension Legislation 190,000 - 190,000 100%TEAM Project UB 5,957,474 4,420,805 5,957,474 100%CAPPS Project UB 910,101 546,359 910,101 100%

Capital Total $ 12,185,801 $ 5,447,097 $ 12,185,801 100%Grand Total $ 213,162,726 $112,694,814 $199,748,258 94%

As of February 28, 2021

FY 2021 FTE Update

7

8

Benefit Services, 241.0 Executive, 5.0

Finance, 87.3

Governmental Relations, 2.0

Information Technology, 91.0

Internal Audit, 14.0

Investment Management, 188.0

Legal & Compliance, 35.0 Organizational

Excellence, 26.5

Strategy Office, 16.5

TEAM Project, 52.0

Pension Funded FTEs758.3

Health and Insurance Benefits, 52.0

Agency Support, 44.0

HILOB Project,27.0

Health Care Funded FTEs123

FY 2021 FTE Summary

9

FY 2021 FTE Status

735.3

230

100

200

300

400

500

600

700

800

Positions Filled Positions in Process

Pension Funded FTEs

Target FTE cap 758.3

107

16

0

20

40

60

80

100

120

Positions Filled Positions in Process

Healthcare Funded FTEs