TRS 2011 Comprehensive Annual Financial Report

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TEACHER RETIREMENT SYSTEM OF TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT 2011 Notes to the Financial Statements Reclassifications Balance Balance and 08/31/2011 Asset Class 09/01/2010 Completed CIP Additions Deletions (Exhibit I) Non-Depreciable Assets: Land and Land Improvements $ 1,658,310 $ $ $ $ 1,658,310 Construction in Progress 1,837,601 (1,776,610) 485,980 546,971 Other Tangible Capital Assets 124,136 124,136 Total Non-Depreciable Assets $ 3,620,047 $ (1,776,610) $ 485,980 $ 0 $ 2,329,417 Depreciable Assets: Buildings and Building Improvements $ 31,087,285 $ 1,635,003 $ 2,161,468 $ 34,883,756 Furniture and Equipment 6,422,928 1,592,784 (185,123) 7,830,589 Vehicles, Boats and Aircraft 45,721 45,721 Leasehold Improvements 3,096,189 3,096,189 Other Capital Assets 247,622 29,432 277,054 Facilities and Other Improvements 141,607 202,015 343,622 Total Depreciable Assets at Historical Cost $ 40,899,745 $ 1,776,610 $ 3,985,699 $ (185,123) $ 46,476,931 Less Accumulated Depreciation for: Buildings and Building Improvements $ (13,677,060) $ $ (927,383) $ $ (14,604,443) Furniture and Equipment (3,953,629) (789,218) 184,576 (4,558,271) Vehicles, Boats and Aircraft (45,721) (45,721) Leasehold Improvements (774,047) (516,031) (1,290,078) Other Capital Assets (171,712) (9,142) (180,854) Facilities and Other Improvements (12,964) (12,964) Total Accumulated Depreciation $ (18,622,169) $ 0 $ (2,254,738) $ 184,576 $ (20,692,331) Depreciable Assets, Net $ 22,277,576 $ 1,776,610 $ 1,730,961 $ (547) $ 25,784,600 Intangible Assets: Computer Software $ 12,853,867 $ $ 462,913 $ (4,477,072) $ 8,839,708 Total Amortizable Assets at Historical Cost $ 12,853,867 $ 0 $ 462,913 $ (4,477,072) $ 8,839,708 Less Accumulated Amortization for: Computer Software $ (7,753,817) $ $ (154,726) $ $ (7,908,543) Total Accumulated Amortization $ (7,753,817) $ 0 $ (154,726) $ 0 $ (7,908,543) Intangible Assets, Net $ 5,100,050 $ 0 $ 308,187 $ (4,477,072) $ 931,165 Fiduciary Capital Assets, Net of Accumulated Depreciation/Amortization $ 30,997,673 $ 0 $ 2,525,128 $ (4,477,619) $ 29,045,182 NOTE 3: DEPOSITS AND INVESTMENTS A. CASH IN BANK AND DEPOSITS Cash and deposits of the system are maintained in bank accounts or in the State Treasury. Foreign bank deposits are reported at current exchange rates. At August 31, 2011, the carrying amount totaled $184,856,481 and the bank balance totaled $184,854,794. The State Treasury invests funds in time deposits, repurchase and reverse repurchase agreements, obligations of the United States, and obligations of various federal credit organizations. The State Treasury has an arrangement with financial institutions to collateralize state deposits in excess of depository insurance. 44 FINANCIAL SECTION
TEACHER RETIREMENT SYSTEM OF TEXAS COMPREHENSIVE ANNUAL FINANCIAL REPORT 2011 Notes to the Financial Statements B. CASH ON HAND AND CASH EQUIVALENTS At August 31, 2011, the system had $2,563,416 in cash on hand. This total is related to checks for purchases of special service that were being held pending approval of rollover transfer forms. Investments with an original maturity of three months or less and that are used for cash management rather than investing activities are considered cash equivalents. Highly liquid investments invested as part of a short-term investment fund are not considered cash equivalents. C. CUSTODY OF INVESTMENTS The system has contracted with State Street Bank and Trust Company to serve as custodian for the system’s investments. D. INVESTMENT LEGAL PROVISIONS AND OTHER CONSTRAINTS Under the Texas Property Code, Section 117.003, a trustee of the board owes a duty to the beneficiaries of the trust to comply with the prudent investor rule. In making investments, the board shall exercise the judgment and care under the circumstances then prevailing that persons of ordinary prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income therefrom as well as the probable safety of their capital. Texas Government Code, Section 825.301(a), Texas Property Code, Section 117.004, and the Texas Constitution, Article XVI, Section 67(a)(3) apply in determining whether a trustee has exercised prudence with respect to an investment decision. Determination shall be made taking into consideration the investment of all the assets of the trust, or the assets of the collective investment vehicle, over which the trustee had management and control. Trustees follow the guidelines provided by the TRS Investment Policy Statement in establishing specific asset allocations, benchmarks, eligible investments and quantitative criteria with the assistance of their investment counsel and investment advisors. Trustees utilize asset allocations and portfolio standards they believe are prudent and appropriate for the long-term objectives of the fund. Categories of permissible investments include equities, debt securities, cash equivalents, alternative investments including private equity, real assets, absolute return, hedge funds, other absolute return investments, derivative instruments authorized by law, mutual funds, closed-end funds, exchange-traded funds, and commingled funds. Investment categories are based on the risk profiles exhibited by those investments. The objectives of the Private Equity and Real Asset investments is to provide a long-term rate of return in excess of the return of the Investment Policy benchmark for each authorized strategy, provide diversification to the Total Fund, and provide for enhanced returns and diversification within the portfolio by allocating assets among the various strategies. Private equity funds build portfolios of private investments in the equity or equity-rights securities of privately-owned operating companies. Real assets focus on private or public real estate equity, private or public real estate debt, infrastructure, timber, agricultural real estate, oil and gas, real asset mezzanine debt or equity, mortgage-related investments, entity-level investments, REITS, MLPs, non-fixed assets and other opportunistic investments in real assets. Funding of committed capital in either the Private Equity or the Real Asset Portfolio will occur over an extended time period and may take several years before the total allocation to each asset class is fully invested. Because an individual investment may begin to return capital to the investor prior to the full funding of the investor’s commitment, the outstanding invested capital of a Private Equity or Real Asset investment might at times be substantially less than the total commitment. Hedge funds are private commingled investment vehicles with the general characteristics as set forth in Texas Government Code, Section 825.3012. Hedge funds include private investment fund of funds or a commingled vehicle that itself invests in hedge funds. TRS investment policy establishes criteria to analyze and determine whether a private investment fund should be classified as a hedge fund. During fiscal year 2011, the permissible hedge fund allocation was increased from a maximum of 5% to a maximum of 10% of the market value of the total fund on the date of each hedge fund investment as a result of a change in the Government Code. Other Absolute Return investments include credit sensitive investments as well as other limited partnerships that are not hedge funds, private equity, or real assets. A commingled fund is a fund which is (i) exempt under the provisions of Section 501(a) of the Internal Revenue Code of 1986, (ii) is not required to be registered as an investment company under Section 3(c)(1), 3(c)(7) or other provisions of the Investment Company Act of 1940, or (iii) is an investment company registered under the Investment Company Act of 1940, as amended, provided that investment and reinvestment of assets complies with the investment guidelines in all respects. FINANCIAL SECTION 45
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Teacher Retirement System of Texas
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TRS 2011 Comprehensive Annual Financial Report

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