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Trusting Your Trust Fund Part 2

Trusting Your Trust Fund Part 2

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Trusting Your Trust Fund Part 2

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  1. Trusting Your Trust FundPart 2 Mark D. Abrahams, CPA President, The Abrahams Group President, AFS Associates MGFOA May 9, 2012

  2. Agenda • To get the practical overview of the proper structure for an OPEB Irrevocable Trust and what should be done about the accounting for an OPEB liability • Presenting an accountant’s view of OPEB Irrevocable trusts, not to be construed as legal, investment, or actuary 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 • Applicable MGLs • Trust Document • Investment Issues • Accounting/Reporting Issues • Sustainability

  4. Follow Up to Part 1 • June 2010 • MGL 30B:20 prior to revisions • GASB 43, 45, and implementation guide • This was two years ago, very early in the OPEB development • I asked many questions then; I am asking many questions today with the main question: can you trust your trust fund? • Survey Says………36 communities, 9 RSDs

  5. Today’s Topics • GASBS 43 and 45 Requirements • 32B:20 • OPEB Irrevocable Trust • Investments • Accounting and Financial Reporting • Sustainability

  6. Section 1 • GASBS 43 and 45

  7. GASB Requirements GASBS 43 - This statement establishes financial reporting standards for OPEB plans of all state and local governments GASBS 45 - This Statement establishes standards for the measurement, recognition, and display of OPEB expense/expenditures and related liabilities (assets), note disclosures, and, if applicable, required supplementary information (RSI) in the financial reports of state and local governmental employers. Implementation Guide – Provides practical guidance to implement GASBS 43 and 45 and other GASB statements

  8. 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

  9. GASBS 45 n a Nutshell:GASB No. 45 for Employers (continued) In a Nutshell:GASB Statement 45 for Employers • Subject: accounting and reporting by employers for their OPEB expenses and obligations - most notably, for retiree healthcare benefits • Applies to all employers that pay all or part of the cost of the benefits

  10. In a Nutshell:GASBS No 45 for Employers (continued) GASBS 45 n a Nutshell:GASB No. 45 for Employers (continued) • Requires a change from PAYGO accounting (expense not recognized until obligation paid in years after retirement) to accrual-basis accounting (recognition of expense during years of active service) • Requires measurement and disclosure of the total and unfunded actuarial accrued liabilities for normal and past service costs—and related information about the funded status of the benefits • Does not require funding of OPEB costs being recognized

  11. Three Broad Steps to Develop OPEB Information • Project cash outflows for benefits • Discount projected benefits to present value (PV) • Allocate the PV of projected benefits to periods using an acceptable actuarial cost method

  12. Service Period 25 40 62 80 Employee Age Timeline Employee Age Timeline Present age Assumed age at retirement Age when hired Life Expectancy

  13. 1) Project Benefits 25 40 62 80 $15000 $ $ $ $ $14000 $4500 2)Discount A.P.V. 3) Actuarial cost method

  14. Actuarial Valuations • For plans with a total membership of 200 or more • At least biennially • Valuations require an actuary • For plans with a total membership of fewer than 200 • At least triennially • Valuations require an actuary • For plans with a total membership of less than 100 • At least triennially • Valuations do not require an actuary

  15. Definitions • Actuarial Present Value is the value of a series of amounts payable at various times, determined as of a given date by the application of certain actuarial assumptions. • Actuarial Accrued Liability is the portion of Actuarial Present Value of plan benefits and expenses which is not provided for by the future Normal Costs. • Annual Required Contribution (ARC) is annual expense under GASB 45 accrual accounting. It replaces the cash basis method of accounting recognition with an accrual method. The GASB 45 ARC is higher than the PAYGO because it includes recognition of employer costs expected to be paid in future accounting periods. • PAYGO Cost is the expected total employer cash cost for the coming period based on all explicit and implicit subsidies. It is also the amount recognized as an expense on the Income Statement under pay-as-you-go accounting. • Normal Cost is the portion of Actuarial Present Value of plan benefits and expenses which is allocated to a valuation year by the actuarial cost method.

  16. GASB 45 For purposes of GASB 45 an employer has made a contribution in relation to the ARC if an employer has: • Made payments directly to or on behalf of a retiree or beneficiary • Made premium payments to an insurer, or • Irrevocably transferred assets (#2) to a trust or equivalent arrangement (#1) in which plan assets are dedicated to providing benefits to retirees and their beneficiaries in accordance with the plan (#3) and are legally protected from creditors (#4) of the employer(s) or plan administrators

  17. 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 • Requires a change from PAYGO accounting (expense not recognized until obligation paid in years after retirement) to accrual-basis accounting (recognition of expense during years of active service) • Requires measurement and disclosure of the total and unfunded actuarial accrued liabilities for normal and past service costs—and related information about the funded status of the benefits

  18. Section 2 • 32B:20 • Satisfy GASBS 43?

  19. MGL • 32B:20 • Ch 479 of 2008 • Amended effective July 1, 2011 • Other Post Employment Benefits Liability Trust Fund • Local Option • Acceptance by town meeting, city council (approval of mayor), municipal light plant vote, county by county commissioners • http://www.malegislature.gov/Laws/GeneralLaws/PartI/TitleIV/Chapter32B/Section20

  20. MGL 32B:20, Ch 479 of 2008 • (a) A city, town, district, county or municipal lighting plant that accepts this section may establish an Other Post-Employment Benefits Liability Trust Fund, and may appropriate amounts to be credited to the fund. Any interest or other income generated by the fund shall be added to and become part of the fund. Amounts that a governmental unit receives as a sponsor of a qualified retiree prescription drug plan under 42 U.S.C. section 1395w-132 may be added to and become part of the fund. All monies held in the fund shall be segregated from other funds and shall not be subject to the claims of any general creditor of the city, town, district, county or municipal lighting plant.

  21. MGL 32B:20 (b) The custodian of the fund shall be • a designee appointed by the board of a municipal lighting plant; • the treasurer of any other governmental unit; or • if designated by the city, town, district, county or municipal lighting plant in the same manner as acceptance prescribed in this section, the Health Care Security Trust board of trustees established in section 4 of chapter 29D, provided that the board of trustees accepts the designation. The custodian may employ an outside custodial service to hold the monies in the fund. Monies in the fund shall be invested and reinvested by the custodian consistent with the prudent investor rule established in chapter 203C and may, with the approval of the Health Care Security Trust board of trustees, be invested in the State Retiree Benefits Trust Fund established in section 24 of chapter 32A.

  22. MGL 32B:20 • (c) This section may be accepted in a city having a Plan D or Plan E charter, by vote of the city council; in any other city, by vote of the city council and approval of the mayor; in a town, by vote of the town at a town meeting; in a district, by vote of the governing board; in a municipal lighting plant, by vote of the board; and in a county, by vote of the county commissioners.

  23. MGL 32B:20 • (d) Every city, town, district, county and municipal lighting plant shall annually submit to the public employee retirement administration commission, on or before December 31, a summary of its other post-employment benefits cost and obligations and all related information required under Government Accounting Standards Board standard 45, in this subsection called "GASB 45'', covering the last fiscal or calendar year for which this information is available. On or before June 30 of the following year, the public employee retirement administration commission shall notify any entity submitting this summary of any concerns that the commission may have or any areas in which the summary does not conform to the requirements of GASB 45 or other standards that the commission may establish. The public employee retirement administration commission shall file a summary report of the information received under this subsection with the chairs of the house and senate committees on ways and means, the secretary of administration and finance and the board of trustees of the Health Care Security Trust.

  24. MA Funding Vehicles • Other Post Employment Benefits Liability Trust Fund – Communities adopting MGL 32B:20 • Group Insurance Liability Fund – Lincoln, Wellesley • Post Retirement Insurance Liability Fund – Lexington • Post Retirement Liability Fund – Bedford • Stabilization Fund - Medfield, Wenham, Danvers • Special Legislation - N Reading, Lexington, Lincoln, Wellesley

  25. MGL 32B:20 Issues • Does 32B:20 meet the GASBS 43 criteria • The statute does use the word “irrevocable” • However, 32B has a provision: “Notwithstanding the provisions of any general law to the contrary, neither the acceptance of this chapter nor the acceptance of any individual section thereof by a governmental unit shall be revoked or rescinded.” • 32B:20 does not use the word “trustee” (other than referencing the Health Care Security Trust board of trustees) • Is 32B:20 intended to be all-inclusive? • 32B:20 specifies “a city, town, district, county or municipal lighting plant” • What about councils of governments, housing authorities, other governments?

  26. Survey Says Did You Adopt MGL 32B:20 • About 50% have adopted 32B:20 or are planning to at this or next year’s town meeting • Three have established a stabilization fund • One filed special legislation

  27. Section 3 OPEB Trust Agreement

  28. OBEB Trust Agreement • There are a number of people who believe 32B:20 does not satisfy the irrevocable criteria of GASBS 43 • 32B:20 does not use the words “irrevocable” and “trustee” • These needs to be clarified • The OPEB trust agreement combined with the acceptance of 32B:20 satisfy the irrevocable criteria of GASBS 43

  29. Trust Agreement • Definitions • Purpose • Establishment • Trust Funding • Trustees • Powers of Trustees • Limitations of Trustees • Actions by Trustees • Meetings of Trustees • Taxes, Expenses and Compensation • Accounts • Annual Reports • Investment of Trust Funds • Custody of Trust Funds • Termination of Trust • Amendments • Merger • Severability of Invalid Provisions • Miscellaneous

  30. Trust Agreement • The Trust shall be administered by a Board of Trustees consisting of five (5) members, who shall include the Town Accountant, Town Treasurer, one member of the Board of Selectmen and two (2) individuals appointed by the Board of Selectmen to terms of not more than two years.   • Satisfies that the plan is effectively a legally separate entity under the stewardship of a board of trustees or the equivalent pursuant to GASBS 43 • The Trust shall be irrevocable, and no Trust funds shall revert to the Town until all OPEB owed to retired Town employees have been satisfied or defeased. • Satisfies the irrevocable requirement of GASBS 43

  31. Survey Says • Very, very few communities have created an OPEB Irrevocable Trust Fund Document • Many did not know about a Trust Document • Many questioned the need for a Trust Document given the acceptance of 32B:20 • This needs clarification

  32. Trust Agreement Questions • Do we need an OPEB irrevocable trust agreement in addition to accepting 32B:20 accepted by board of selectmen, mayor? • Best practice is to • Accept 32B:20 • Accept an OPEB irrevocable trust agreement document

  33. Section 4 • Investments

  34. Investments • MGL 44:55 – General Fund • MGL 44:54 – Trust Funds • MGL 203C – Prudent investor rule • MGL Monies in the fund shall be invested and reinvested by the custodian consistent with the prudent investor rule established in chapter 203C • MGL 32A:24 - State Retiree Benefits Trust Fund • May, with the approval of the Health Care Security Trust board of trustees, be invested in the State Retiree Benefits Trust Fund established in section 24 of chapter 32A.

  35. MGL 32A:24 – State Retiree Benefits Trust Fund • There shall be established and set up on the books of the commonwealth a fund to be known as the State Retiree Benefits Trust Fund. The Health Care Security Trust board of trustees established in section 4 of chapter 29D shall be the trustee of and shall administer the fund in accordance with that section. The fund shall be an expendable trust not subject to appropriation. • The purpose of said fund shall be for depositing, investing and disbursing amounts set aside solely to meet liabilities of the state employees' retirement system for health care and other non-pension benefits for retired members of the system and for depositing, investing and disbursing amounts transferred to it under subsection (d).

  36. MGL 32A:24 – State Retiree Benefits Trust Fund The Health Care Security Trust Board is currently adopting procedures to allow political sub-divisions of the Commonwealth to use the Trust (invested in PRIT as part of the core fund) to invest their assets (d) Upon authorization by the board, any political subdivision, municipality, county or agency or authority of the commonwealth may participate in the fund using procedures and criteria to be adopted by the board. (e) The fund shall be revocable only when all such health care and other non-pension benefits, current and future, payable pursuant to this chapter have been paid or defeased.

  37. Survey Says • Most communities are investing in “safe” vehicles • Discount rate ranged between 4% and 9% • Many stated 4.25% for underfunded systems and 8% for funded systems • However many communities that have not adopted 32B:20, do not have an irrevocable trust, report a discount rate around 8%

  38. Investment Issues • The higher the discount rate the lower the ARC and the AAL • A higher discount rate generally relates to an investment strategy consistent with a true OPEB irrevocable fund with plan assets capable of attaining 7 – 8% interest • Many OPEB are reporting high interest rates without establishing a true OPEB irrevocable trust fund (accepting 32B:20, and/or an irrevocable trust fund document) • PRIT may be a vehicle to attain a higher return

  39. Section 5 GASB 45 Reporting Issues • Governmental fund • Fiduciary fund State Reporting Requirements • 32B:20(d) PERAC reporting

  40. GASB 45 Reporting Issues • How do you present OPEB on the financial statements? • Governmental plan assets • Fiduciary plan assets • General but not total consensus among audit firms

  41. Massachusetts GASBS 45 Issues Meets the criteria of an OPEB irrevocable trust fund • OPEB accounting in the general fund reclassified to a fiduciary fund • OPEB accounting in the fiduciary fund Does not meet the criteria of an OPEB irrevocable trust fund • OPEB accounting and reporting in the general fund with OPEB reported as a committed or restricted fund balance MSCPA Government Audit and Accounting Committee presenting at the annual conference on June 15, 2012

  42. Fiduciary Fund Presentation

  43. State OPEB Reporting Requirements MGL 32B:20 (d) • Shall annually submit to the PERAC on or before December 31, a summary of its OPEB cost and obligations and all related information required under GASB 45, covering the last fiscal or calendar year for which this information is available. • On or before June 30 of the following year, PERAC shall notify any entity submitting this summary of any concerns that the commission may have or any areas in which the summary does not conform to the requirements of GASB 45 or other standards that the commission may establish. • PERAC shall file a summary report of the information received under this subsection with the chairs of the house and senate committees on ways and means, the secretary of administration and finance and the board of trustees of the Health Care Security Trust.

  44. Reporting Impact • What is the impact on the financial statements of funding OPEB with a trust or equivalent arrangement consistent with the GASB criteria or funding OPEB with a vehicle that does not meet the GASB criteria? • How are you addressing 32B:20(d) for PERAC reporting?

  45. Impact • If an employer decides to fund for OPEB Benefits, it has some choices with respect to the funding vehicle, but it is anticipated that most will adopt 32B:20 • Funding of OPEB Benefits liability through a trust meeting the GASB requirements allows the public employer to use a higher discount rate in calculating its unfunded liability, which results in a reduction in the amount reported as the OPEB Benefits liability in its financial statements

  46. Impact Stabilization or other dedicated funds • Contributions to such an internal fund will generally not qualify as contributions toward the ARC nor as plan assets for GASB 45 purposes, which require an irrevocable contribution to a trust or equivalent arrangement protected from creditors and dedicated solely to providing benefits to retirees and beneficiaries in accordance with the terms of the OPEB plan.

  47. Impact • Therefore, stabilization fund or similar fund will still be considered a governmental, not fiduciary fund • In calculating the OPEB UAAL and related ARC, the investment return assumption applicable to deposits in such fund will likely be based on the municipality’s return on its general (largely short-term) investments (roughly 3–5% today) compared to the much higher investment return assumption (7% to 8%) used by pension funds, especially if large and diversified

  48. Impact • The investment return assumption is the equivalent of a discount rate used in present valuing future OPEB payments • The difference in investment return assumptions will make a very significant difference in OPEB UAAL and ARC amounts • Therefore, most governments choosing to undertake an OPEB funding program should use an OPEB trust that meet GASB’s requirements • Some may and have used the stabilization fund option temporarily until 32B:20 is accepted

  49. Impact Without a proper trust and fully funding the ARC, employers must use a lower discount rate resulting in a higher AAL and ARC

  50. Trusting Your Trust Fund The true test? • Can a community withdraw funds from Ch32B:20 for other than OPEB purposes? • If DOR allowed this transfer to occur then the GASB Implementation Guide specifically states that what was considered to be a qualified fiduciary trust would immediately revert back to a governmental fund.