Trusting Your Trust Fund Part 3

1. Trusting Your Trust FundPart 3 Mark D. Abrahams, CPA President, The Abrahams Group President, AFS Associates MGFOA September 19, 2012

2. Agenda • Provide an update about the accounting/reporting for an OPEB liability • Present an accountant’s view of OPEB Irrevocable trusts, not to be construed as legal, investment, or actuarial advise, nor opinions of the MSCPA’s Governmental Auditing and Accounting Committee, DOR or anyone else

3. Learning Objectives To understand • GASB requirements for an OPEB irrevocable trust • GASBS 43 • GASBS 45 • Massachusetts’ OPEB irrevocable trust • 32B:20 • Trust Document • Accounting/Reporting

4. Today’s Agenda GASBS 43 and 45 n a Nutshell:GASB No. 45 for Employers (continued) GASBS 43 • Administered as trusts, or equivalent arrangements • Employer contributions to the plan are irrevocable • Plan assets are dedicated to providing benefits to their retirees and their beneficiaries in accordance with the terms of the plan • Plan assets are legally protected from creditors of the employer(s) or the plan administrator GASBS 45 • Establishes standards for the measurement, recognition, and display of OPEB expense/expenditures and related liabilities (assets) • Consistent with GASB 27; Accounting for Pensions • Intended to improve financial reporting

5. GASBS 43 Trusting Your Trust Fund: The Big Four • Administered as trusts, or equivalent arrangements (the plan is effectively a legally separate entity under the stewardship of a board of trustees or the equivalent) • Employer contributions to the plan are irrevocable • Plan assets are dedicated to providing benefits to their retirees and their beneficiaries in accordance with the terms of the plan • Plan assets are legally protected from creditors of the employer(s) or the plan administrator

6. Follow Up to Parts 1 and 2 • June 2010, May 2012 • MGL 30B:20 prior and during revisions • GASB 43, 45, and implementation guide • I asked many questions then; I am asking fewer questions today with the main question: can you trust your trust fund? • The short answer is yes, but…..

7. Trusting Your Trust Fund Update What is Clear • Adopt 32B:20 • Accept a legally binding, OPEB trust fund document that is irrevocable and provides for a trustee What Is Becoming Clearer • All inclusive/ all political sub divisions of the Commonwealth? COGs? Collaboratives? • Financial statement impact

8. Special Purpose Stabilization Fund • Presented as restricted within the governmental funds in the government-wide financial statements • Presented as committed within the general fund in the fund-wide financial statements • Annual difference between ARC and pay-as-you go is reflected as expense within the applicable governmental or business-type activities columns in the government-wide financial statements • Accumulated difference between ARC and pay-as-you go is reflected as a liability within the applicable governmental or business-type activities columns in the government-wide financial statements

9. Plan Established Under Special Legislation • Present as a fiduciary fund • Assets and equity are not presented in the government wide financial statements • Annual difference between ARC and pay-as-you go is reflected as expense/income in the applicable governmental or business - type activities columns in the government-wide financial statements • Accumulated difference between ARC and pay-as-you go is reflected as a liability/asset in the applicable governmental or business - type activities columns in the government-wide financial statements

10. Plan Under 32B:20 • Accounting treatment under MGL Chapter 32B, Section 20 provides the most difficult challenges • A recent survey suggests that 50% of communities in Massachusetts have adopted or intend to adopt MGL 32B, Section 20 • Is it a Fiduciary Fund? • Is it a Governmental Fund? • Must prove substance over form

11. Substance Over Form Intent of Local Government • Is the government truly committed to funding the Trust • Is this evidenced through follow through of the requirements of MGL 32B, 20; or • Conversely, has this been established only to satisfy the auditors management letter concerns and the credit rating bureaus, with no intent to fund apparent • Plan agreement would solidify intent (the holy grail) • Is this evidenced through contribution activity

12. Other Treatments General Fund Fiduciary Fund 32B:20 acceptance Irrevocable trust fund document Material amount of money invested An immaterial amount of $ invested would trigger a governmental fund presentation • No 32B:20 acceptance • No irrevocable trust fund document • Does not matter how much money is invested Governmental Fund • 32B:20 acceptance • No irrevocable trust fund document • Other non major fund or major if satisfies 10% rule

13. Governmental Funds Balance Sheet Governmental Activities Total Gov'tal Funds Other Gov'tal Funds General Fund Major Fund 2 Major Fund 1 Assets Liabilities Fund Balance

14. Statement of Fiduciary Responsibilities • OPEB Benefits Liability Trust Fund Private Purpose Trust Funds Employee Retirement Plan Agency Funds Assets Liabilities Net Assets Changes in Net Assets Additions Deductions

15. Discount Rate Determination

16. MSCPA Government Audit and Accounting Committee • Meeting this Friday with A&F • Objective is to determine if 32B:20 should be amended, and if so, determine action steps, to be filed by this November • Please contact me if you have any suggestions about changing 32B:20 or any OPEB concerns

17. For Further Information Mark D. Abrahams, CPA President, The Abrahams Group President, AFS Associates Phone: 508 788-9172 Fax: 508 788-6217 Bettergov@aol.com www.theabrahamsgroup.com www.acopeb.com