OPEB JPA INVESTMENT TRUST AND GASB STATEMENT 45 FAQS
QUESTIONS REGARDING OPEB JPA INVESTMENT TRUST
Is "funding" of this liability mandatory at this stage?
No, GASB cannot force any public entity to fund its liability. However, GASB does have the authority to require a public entity's auditor to post the liability on the annual financial statements.
Could a district be held liable for other members' retirees and their benefits in this JPA?
No, each district is only responsible for its contributed share of the liabilities of the parties.
How is this JPA different from the CalPERS program?
This JPA, through its Board, will consider the full range of available investment and trust options for employers prefunding their GASB 45 liabilities. Thus, employers participating in the JPA will retain control of their health plan design and participate in the investment decisions made by the JPA Board – in contrast to the CalPERS program where many of these decisions are made at the State level.
While local employers have some options in adopting health coverage, CalPERS controls the range of options. Of California's approximately 6,000 local government agencies, only about 1,100 participate as PEMHCA employers. The rest typically belong to (1) a County program (covering multiple employers); (2) an independent, multiple-employer health trust; or (3) a single employer plan (that is, their own independent design).
CalPERS formed the California Employers Retirement Benefit Trust (CERBT), an investment trust which opened July 1, 2007 for PEMHCA employers. Under legislation recently signed by the Governor, effective January 1, 2008, this trust can accept deposits from any of the 6,000 California local government agencies. While the terms of participation are tightly controlled for PEMHCA employers (for example, a mandated actuarial valuation methods and assumption package), it is uncertain how participation will be extended to non-PEMHCA employers.
Is it true that labor union states will have no real affect on credit/bond ratings since a number of agencies have these obligations, and bond rating agencies have already taken these liabilities into account?
Rating agencies have only accounted for the information now available, which is typically the premium currently being paid for retirees. GASB 45 liabilities are much larger. The rating agencies have been clear that they expect to see agencies plan for these new liabilities. Obviously, the most favorable ratings will go to those agencies fully prefunding their liabilities, and the least favorable to those with no plan.
Is an agency required to do a valuation if it guarantees retiree benefits in the future, but has no retirees at the moment?
GASB 45 liabilities must be disclosed regardless of the number of retirees. Even if there are no current retirees, the liability for active employees must be computed and disclosed. And, for a favorable credit rating, the liabilities must be prefunded starting with the fiscal year in which the agency begins disclosure.
How will this affect mergers and consolidations?
As to mergers and consolidations of agencies, the results will depend on the plan design of the retiree benefits after merger. As to mergers and consolidations of investment funds, the details of each situation would be reviewed and acted upon by the JPA Board.
Will there also be access to HRA or HSA accounts?
This is a separate issue from the JPA and trust, whose focus is asset investment. Health plan administration will remain in the control of each member.
What is the IRS Private Letter Ruling?
The suggested investment trust for the JPA is an IRS Code Section 115 governmental trust. In order to insure favorable tax treatment for employees, it is desirable to have a Private Letter Ruling (PLR) from the IRS on the trust. The application is now in process.
Will there be a provision in the trust documents which allows a city to get its money back if its liability is found to be zero, such as if the State passes health insurance coverage for all?
Initially, of course, deposits will be made based on identified GASB 45 liabilities. Contributions to any trust must be irrevocable to be recognized as contributions under GASB 45; as such, there are extremely limited circumstances under which contributions may be refunded. It is unlikely that any scenario will emerge where employers promising these benefits will be fully relieved of financial responsibility, and all obligations of the trust would have to be satisfied before any reversion of assets to the employer could occur. These matters would certainly be under the control of the JPA Board.
What happens to the money the cities have put in if the State does away with GASB 45?
GASB 45 is under the control of the Government Accounting Standards Board, not the state. The Texas legislature did vote to ignore GASB 45, but most Texas local agencies are going forward with compliance. This is because they will be downgraded by the rating agencies if they do not, and they will not be in compliance with generally accepted accounting principles for governmental agencies. Regardless of the future of GASB 45, these liabilities are owed to employees and retirees, and all irrevocable trusts will continue to pay the liabilities as they become due. If contributions stop, payments will stop as funds are exhausted.
Each participating agency will have different deposit amounts. Will interest earned on these deposits be distributed equally among the members, or determined by each agency's account balance?
Assets deposited will be tracked and recorded according to the time or date that they are invested, similar to a company 401-k program. Returns will be awarded to each participant according to the investment pool and period of time invested. This process is called unitization – the same method employed when investing in a mutual fund.
Will we be allowed to deposit funds periodically as we have funds to provide, or do we have to invest on a regular basis?
Funds can be deposited at any time, and will be unitized similar to a mutual fund in a 401-k program. Performance will be tracked and recorded for each agency that deposits assets.
Will investments be limited to the restrictions of Government Code 53600?
No, we will not be restricted by this Government Code because of the development of the 115 Irrevocable Trust. Once the trust is in place, we will develop an investment policy that includes the use of equities. The Board will be instrumental in the development of the investment policy.
Is there a possibility that certificates of participation or revenue bonds could be utilized to help fund the benefits?
The issuance of certificates of participation and/or revenue bonds will be considered by and decided upon by the Board.
Is the list of Formation Team members available on the website?
We are still soliciting interest in the Formation Team. The final member list will be available on the website.
How will Board members be selected, and how many? What are their terms? How often and where will they meet?
Governance of the JPA will be determined based on input from the Formation Team. The number of Board members, their terms, and how often they meet will be recommended by the Formation Team. All governing documents will be subject to Board approval.
BASIC QUESTIONS ABOUT GASB STATEMENT 45
What was the rationale behind issuing Statement 45?
The reasoning behind Statement 45 was to help governmental entities realize the costs and financial obligations of providing OPEB, other than pensions, as part of the compensation to their employees.
What was the goal of GASB when it implemented Statement 45?
With Statement 45 now implemented, many entities will report OPEB liabilities on their balance sheets for the first time for services rendered in the past. GASB's goal is for public entities to recognize these liabilities and plan how to pay them down, ending the "pay-as-you-go" process.
Will Bickmore Risk Services & Consulting be providing the actuarial studies, or will the city need to hire an outside actuary to perform these studies?
BRS currently provides GASB 45 actuarial valuation services. Whether such services will be provided through the JPA will be decided by its Board.
Do you have a list of actuarial firms doing the OPEB actuarial study?
A list of such firms can be found on the CalPERS website.
Prior to Statement 45, how were governmental entities keeping track of their financial obligations?
Prior to Statement 45, public entities followed a "pay-as-you-go" approach where the costs were not reported until employees retired.
Where can the mathematical formulas be found for the Alternative Measurement Method for agencies with under 100 employees?
The details of the alternative measurement method are given in the text of GASB 45. The document can be obtained through a financial reporting service or directly from the Government Accounting Standards Board (where it can be ordered online).
It is important to remember that many investment vehicles, including CalPERS, currently require an actuarial valuation of these liabilities and do not accept the alternative measurement method. Also, the method is intentionally conservative, so it tends to overstate liabilities. Finally, the method was developed because of concern about the expense of a complete valuation. As prices have come down, there have been clients who previously completed the approximate method elect to complete an actuarial valuation.
When there is a merger between two agencies, how is the trust used to offset the unfunded liability?
In this situation, the liability of the merged agency would be determined by the benefit promise in place after the merger. Assets will be the combination of assets the agencies had before the merger, plus any earnings and contributions after the merger. The total unfunded liability will be the total liability minus the total assets. If one agency wished to restrict its assets for its pre-merger retirees and employees, it would typically be worked out as a detail of the merger. Otherwise, all assets generally become available to fund all liabilities.
You didn't answer the question: If there is zero liability, can a member get its money back?
CalPERS is structuring their investment trust that way. The JPA Board, which is composed of trust members, would presumably distribute all remaining assets to each member.