Simple, cost effective with a prudent investor standard
This question has been discussed and debated at length elsewhere, so we will limit our comments to a few basic points that we believe you should consider in your planning.
– Your district will achieve the ability to earn a rate of investment return superior to funds held internally or in the County’s coffers.
– The actuary may be able to use a higher discount rate for your GASB 45 valuation, which will lower your Accrued Liability and annual accrual expense.
– In addition to the benefits of a higher discount rate, amounts set aside in an irrevocable trust serve to reduce future years’ GASB 45 expense; internal or earmarked funds do not.
– Amounts in an irrevocable trust serve to reduce the reported Unfunded Accrued Liability and show on the plan’s Schedule of Funding Progress under GASB 43; internal or earmarked funds do not.
– Amounts funded through a trust may be eligible for reimbursement under categorical programs.
– Auditors and organizations charged with the financial oversight of California public agencies will look very favorably on the establishment and funding of a trust, as de facto evidence of the agency’s financial responsibility.
Loss of control of district funds deposited to the trust – It’s perhaps the only significant disadvantage, but it’s a very real concern. In our opinion, the best way to address this concern is through a funding policy that does not have full funding (a zero Unfunded Accrued Liability) as its goal. Our actuaries are currently recommending funding policies that would result in plans being funded up to about 70% of the Accrued Liability. For a number of very good reasons, this 70% target should allow a district to achieve all of the advantages of a trust while minimizing any possible disadvantages.
There may be considerations specific to your agency in developing a funding policy. Employers with declining enrollment and a level or shrinking property tax base should usually fund sooner rather than later. Districts with declining enrollment and a rapidly increasing local property tax base may wish to at least partly delay pre-funding until property tax revenues can provide a more accessible source of pre-funding the GASB 45 liability. Districts with both increasing enrollment and increasing revenue bases may wish to express the pre-funding commitment as a percentage of increasing payroll. Your actuary can work with you to establish a pre-funding pattern that best suits your needs.