Building relationships to deliver innovative coverage
But we don’t have any money to pre-fund!– Use updated info provided below.
One of the nice things about pre-funding retiree health benefits is that there are no strict funding rules to adhere to, such as there are with pensions. You may adopt a flexible funding policy under which it contributes larger amounts in the good years and no additional amounts in lean years. Many agencies have budgeted a modest additional amount of covered payroll for contribution to the trust. And remember: a trust is only “irrevocable” in that once money is contributed to it, it must be used for retiree health benefits only. The SISC GASB 45 Trust is an irrevocable trust under California State law, and IRC Section 115, however, should the situation occur, the SISC Trust Agreement allows for assets in excess of liabilities to be returned to the employer.
It’s important to face up to the mounting costs of retiree health sooner rather than later. If you can’t afford the benefits today, odds are you’ll be even less able to afford them five or ten years from now. Establishing a trust for pre-funding now will increase your ability to meet your agency’s future obligations, and will help your Board arrive at a funding policy that is optimum for your particular circumstances.
Actuarial Valuation – Use updated info provided below.
Timing of the valuation
GASB 45 requires actuarial valuations once every two years, with an exception for plans with fewer than 200 members (active employees and retirees). Plans meeting the exception need to have valuations once every three years. The valuation is done at the beginning of the fiscal year and is used for the two upcoming fiscal year-ends (or three if the exception is met.)
However, GASB 57 has clarified that if an employer joins a pooled trust such as the SISC GASB 45 Trust, the combined membership of all the employers in the pool must be considered in meeting the 200 member threshold, and all employers in that trust should have a common actuarial valuation date.
To avoid forcing a district to have an extra valuation as a result of joining the SISC GASB 45 Trust, SISC has established two separate trusts. One has its valuation date on July 1 of even-numbered years (July 1, 2012, 2014, etc.) and the other on July 1 of odd-numbered years (July 1, 2013, 2015, etc.). In order to determine which SISC Trust you should join, and what your next actuarial valuation date should be, please send a copy of your most recent valuation to Megan Hanson at SISC.
Over the last few years, we have found that many districts have waited until the last minute to request an actuarial valuation. One popular strategy is to wait until the auditors are on-site and notify the district that a new valuation is required. This increases the stress level for all parties involved, and increases the chances that your district will be found out of compliance. We continue to recommend that you start the valuation process well before the fiscal year-end for which the auditors will require the new report.
Choice of Actuarial Firm
The SISC GASB 45 Trust is committed to flexibility in choice of actuarial assumptions and methods, as well as in your choice of an actuarial service provider. For those districts who have not yet selected an actuarial firm, or for whatever reason are considering changing firms, SISC recommends Demsey, Filliger & Associates (DF&A). DF&A has provided thousands of GASB 45 actuarial valuations to California school districts and other public agencies. DF&A has user-friendly actuarial reports and very competitive fees. They also offer complimentary assistance in preparation of the GASB 45 disclosures for your audited financial statements, interfacing directly with your auditors to make your life easier.
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 timeline: Standard turnaround time will vary from one actuarial firm to the next, but it will generally range from one to two months from the time the actuary receives all necessary data until receipt of the valuation. Faster turnaround may be available upon 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: In most cases (no matter how complete your data package is) the actuary will most likely need to contact the employer 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. Most questions can be answered at a level below that of Assistant Superintendent; however, certain questions regarding district policy and interpretations of collective bargaining language may require brief involvement of a senior district official.
Draft actuarial report: This is a first report for your 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. You should be comfortable with your actuary and expect him or her to be receptive and willing to answer questions or concerns and address any inaccuracies during this review process.
Final report & Board presentation: You may feel confident enough to present the report to the Board yourself. Or 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.
What if we have less than 100 plan members? – Use updated info provided below.
Districts 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 district falls into this category, please contact Kim Sloan or Megan Hanson 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 district 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 district. These results are not guaranteed and will vary from district to district.
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 district officials and the school 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 your operations, then a simplified valuation should suffice.
Advantages/Disadvantages of an Irrevocable Trust – Use updated info provided below.
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.
One size doesn’t fit all
– 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.