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Self-Insured Schools of California (SISC) would like the opportunity to assist you and your agency in managing the financial impact created by the Governmental Accounting Standards Board Statement No. 45 (GASB 45). SISC has developed its own GASB 45 compliance program called SISC GASB 45 TRUST. There are several competing GASB 45 programs available, but we believe the SISC Trust affords you a preferred way to offset and address your agency's impending financial impact through:

Administrative Safety - SISC is a JPA administered by the Kern County Office of Education. SISC is not a private, for profit, entity. This is a 100% self-contained program, administered by SISC.
All-inclusive low fee structure. Our goal is to keep it simple and cost effective. Annual fees include:
Compliance - The SISC GASB 45 Trust is a tax-exempt governmental trust established under Internal Revenue Code Section 115, and an irrevocable trust under applicable law of the State of California.
Reporting - By adopting an irrevocable trust, your agency will greatly reduce the audit disclosures required. The SISC GASB 45 Trust program will provide quarterly statements and an annual audited financial statement to assist you with GASB 45 reporting requirements.
Investment Performance - The SISC GASB 45 TRUST will maximize investment return, while adhering to the prudent investor standard of investing and follow a formal Investment Policy Statement. The investment platform is a successful, established platform that consists of a balanced portfolio of equities, fixed income and liquid investments.
Ease of Administration - SISC has designed a program that is cost effective, with minimal administrative requirements for your agency. A single Trust Agreement, Trustee, Investment Policy and investment strategy for all members eliminates incurring these costs individually.

Why should we comply now rather than later?

GASB 45 is scheduled to take effect on July 1, 2007 for the largest agencies (called "Phase I"), July 1, 2008 for the next largest tier ("Phase II"), and July 1, 2009 for all others ("Phase III"). GASB 43 takes effect one year earlier in all cases. For Phase II and III employers, there may be a tendency to delay the initial GASB 45 valuation.

SISC believes that it's a good idea for employers to have the first actuarial valuation performed as soon as possible. There are a number of reasons why this is so:

Presenting the Other Postemployment Benefits (OPEB) liabilities to your board now gives them time to research, and eventually adopt, a viable plan of action to manage those liabilities.
Having the initial actuarial valuation at hand during the next round of collective bargaining gives an excellent starting point for talks relative to changes in plan design that a great majority of employers are now finding necessary.
If a change in plan design is made for the current cycle, it will have had 2 to 3 years to work its way into the accrued liability. Plan design changes are most frequently made with respect to new hires, and new hires have no accrued liability, since they have no past service. Put another way, a change made on July 1, 2006 pertaining only to employees hired on or after that date has no effect on the July 1, 2006 valuation. By July 1, 2008, however, the accrued liability will be somewhat lower than what it would have been absent a change on July 1, 2006.
It's best to begin pre-funding benefits as soon as possible, and a well-constructed actuarial valuation report should contain several proposed alternate schedules for pre-funding. This will give the employer time to adopt a funding strategy, decide on a trust vehicle to accomplish the pre-funding, and adopt the necessary paperwork and budgeting strategies to get the ball rolling. Further, each year for which pre-funding is delayed can produce an increase of 10% or more in the recommended annual pre-funding amount.

The reason most often given for delaying the process is postponing the expense of performing an actuarial valuation. SISC believes that a good actuarial valuation will pay for itself many times over through cost savings resulting from better-informed financial decisions. SISC recommends the firm of Demsey, Filliger & Associates, (818) 718-1266.

What to expect during the valuation process

Once you've made the decision to do a GASB 45 valuation and selected the actuarial firm to perform the valuation, the next steps are as follows:

Establishing a time line: Standard turnaround time can vary from one actuarial firm to the next, but in general it will range from one to two months from the time the actuary receives all necessary data for the valuation. Faster turnaround may be available on request. As a minimum, you should allow 3 weeks from the time the data is provided to the delivery of the draft actuarial report.
Data request: This is often the most time-consuming part of the valuation process. Providing the actuarial firm with complete and accurate data will improve the quality of the numbers in the final report. Follow-up questions on the data are the norm. It is unlikely that the data package will be so complete and perfect that it doesn't necessitate a call back to the district with at least a few questions. You'll need to have a responsible, reliable contact person available for a couple of weeks to answer the actuary's questions about the data.
Draft actuarial report: This is your initial review. At this point you want to make sure there are no obvious errors in the data, plan provisions, or actuarial assumptions that appear at odds with your agency's situation. Expect the actuary to be receptive and willing to answer questions and address any inaccuracies during this window.
Final report & Board presentation: You may feel confident enough to present the report to the Board yourself; in complex or unusual situations you may want to introduce the actuary to the Board and have the actuary make the presentation. Either way, the job isn't finished until everyone is comfortable with the valuation report.

Time frame - how long is the valuation good for?

Actuarial valuations are done as of a "valuation date". The two most common choices for valuation date are the beginning of the fiscal year and the end of the fiscal year. We believe the beginning-of-year approach to be the much more common of the two, so let's assume for the sake of discussion that if you were to contract for an actuarial valuation at this moment, you'd use a valuation date of July 1. The question is: Will you be able to use this valuation for actual implementation of GASB 45?

The answer depends on whether you are a Phase I, Phase II, or Phase III agency. The GASB 45 implementation guide says that an actuarial valuation performed during one of the two most recent fiscal years may be used for a given fiscal year.

Phase I agencies implement GASB 45 on July 1, 2007, the two most recent fiscal years are FYE 05 and FYE 06, and a July 1, 2006 valuation clearly may be used for implementation.

Phase II agencies implement GASB 45 on July 1, 2008, and a July 1, 2006 valuation may also be used for implementation (since it falls in the second fiscal year prior to the reporting year.)

Phase III agencies implement GASB 45 on July 1, 2009, and would need to use a valuation date of July 1, 2007 or later for implementation purposes.

Caps on retiree benefits

Over the past several years, it's become quite common for employer's to place "caps", or dollar limits, on their annual contribution towards employee healthcare benefits. This cap frequently applies to retirees as well. There are roughly two kinds of caps, which could be called "hard caps" and "soft caps".

By "soft cap" we mean a dollar limit that happens to be equal, or approximately equal, to the total of the premiums for all the various healthcare coverages (medical, dental, vision, etc.) for the current year. If there are multiple medical plan options, the soft cap will sometimes be set to the cost of the package with the least expensive medical option, with employees and retirees paying the cost of moving up to a better plan. When the cost of the premiums goes up, the soft cap goes up along with it, usually in lock-step.

By "hard cap" we mean a dollar limit that is intended to apply at least until the end of the current bargaining cycle, and, in fact, may never be increased. Sometimes, employees hired prior to a certain date are subject to a soft cap and those hired on or after that date are subject to a hard cap. Sometimes the hard cap is set quite low relative to the total premium package.

While hard caps do serve to limit the employer's annual cash outlay, both for retirees and active employees, they do not completely insulate the agency from the effects of healthcare inflation under GASB 45. This is because GASB 45 requires the actuary to look beyond the premium to arrive at the underlying claim costs expected to be incurred by the agency's retirees.

Employers that have implemented or plan to implement a cap, need to fully disclose all pertinent information to their actuary. The actuary and agency's officials should review and discuss the intent or goal of the cap. The actuary may have to make an educated guess or assumption for the valuation process. The assumption regarding future cap increases should be reviewed in subsequent actuarial valuations and adjusted accordingly as cap history develops over time.

What are the advantages and disadvantages of an irrevocable trust?

Advantages:

Your agency will achieve the ability to earn a rate of investment return superior to funds held internally or in the County Treasury.
Amounts set aside in an irrevocable trust serve to reduce future years' ARCs (the annual 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; while there's no guarantee that these amounts will be eligible for reimbursement, it's fairly certain as of the date of this writing that expenditures not funded through a trust will not be eligible for reimbursement.
Auditors and organizations charged with the financial oversight of California school districts and public agencies will look very favorably on the establishment and funding of a trust, as real evidence of the employer's financial responsibility.

Disadvantages:

Loss of control of 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 an agency to achieve all of the advantages of a trust while minimizing any possible disadvantages.

One Size Doesn't Fit All:

There may be considerations specific to your agency in developing a funding policy. For example, school districts 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. Demsey, Filliger & Associates will work with your agency to establish a pre-funding pattern that best suits your needs.

What if we have less than 100 plan members?

Agencies with under 100 plan members (including active employees, retirees, and terminated employees due deferred benefits) may use a simplified alternative method that doesn't require an actuary for determining their GASB 45 liability. If your agency falls into this category, please contact Cindy Mattern at SISC for a discussion of options available to you, ranging from do-it-yourself to significant actuarial assistance.

The results of a simplified calculation will be valid for developing a pre-funding strategy that the employer could use as a basis for making periodic contributions to the SISC GASB 45 Trust. There may be advantages to having a full actuarial valuation done even if you are eligible for the simplified method. For example, the simplified method is based on a 'canned' set of actuarial assumptions. It is possible that a full actuarial valuation could result in a lower liability and annual expense for your agency. These results are not guaranteed and will vary from organization to organization.

In general, if your retiree healthcare benefits are the subject of significant contention at the bargaining table, or otherwise a source of concern for top officials and the board, then we recommend that you have a full actuarial valuation done. If, on the other hand, your retiree healthcare obligation is not perceived as being a significant issue in the agency's operations, then a simplified valuation should suffice.

Final thoughts

Districts that were required to have valuations performed under AB 3141 (Ed Code 42140) between 1995 and 2005, because of offering post-65 healthcare benefits, are, for the most part, in a much better position today as a result. Those districts already faced up to the bad news, made plans for it, made any required adjustments in plan design; and some have made significant progress towards fully funding their accrued liabilities. History clearly demonstrates that the sooner an agency establishes a plan for managing its GASB 45 liabilities, the better off it will be both in the short and long run.

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