Prefunding OPEB Liabilities – Something IS Better Than NothingCategories: California Developments,Hot Sheets,OPEB/GASB 45/75
Corning Union Elementary School District is located in a small city about three hours north of Sacramento. Similar to most districts over the decades, Corning UESD had uncapped benefits and followed a pay-as-you-go approach for their other postemployment benefits (OPEB). As health costs rose steadily, so too did the District’s OPEB liabilities – reaching an untenable situation in which the County was about to assume oversight over District finances in the early 2000’s. New leadership soon was in place and Corning UESD began making important changes towards improving their financial health.
An Early Adopter
In 2004 during a financial strategy meeting, several District leaders who had come from the private sector, thought back to how companies were complying with FASB 106 (the private sector version of GASB 45). Private businesses were prefunding their OPEB benefits by putting money into irrevocable trusts which were diversified in equities, and in turn generated a greater rate of return. Upon an initial search for public sector equivalents, the District discovered that while nothing currently existed, PARS was in the final stages of setting up a program for the California School Boards Association (CSBA). A few months later, Corning UESD became the first member of the CSBA GASB 45 Solutions Program, ahead of GASB 45 implementation.
Small Amounts Make a Difference
With an OPEB trust in place, Corning UESD made their first deposit of $212,500 into the CSBA trust in 2006– well before most districts in the state. While the contribution only equated to 8% of their total unfunded liability (UAAL), the District planned to pay off their pay-go costs separate from the trust, and allow the money that was contributed to remain untouched and accrue interest. For the next few years, Corning UESD continued this annual process of contributing a small percentage of the UAAL into the trust, and built just under $1 million in assets. As a result of these methodical contributions, Corning UESD’s 2008 actuarial report saw a drop in total UAAL by 28%, a negative ARC amount, and the ability for its actuary to use a 6% discount rate rather than the typical 4.5% or less. Moreover, these benefits came from a conservatively invested account of 80% fixed income and 20% equities.
Life-Saver During Downturn
Fast forward to 2009 and Corning UESD found itself in the midst of the economic downturn and unable to afford any amount toward their OPEB – pay-go or prefunding. Facing potentially severe budget cuts in order to cover even OPEB pay-go amounts, the CSBA Program’s flexibility instead allowed the District to use trust money already in the account to pay out benefit premiums. This literally saved the day – District leadership acknowledges that the ability to use those trust funds were a tremendous help during the downturn. Not wanting to impede the ultimate goal of fully prefunding OPEB, Corning included a plan/promise to start-up contributions to the trust once the economy recovered, which they did in 2012.
Today, Corning UESD is back to annually contributing additional funds into their OPEB trust, and has moved its investment strategy to a 60/40 fixed income to equities split.
An Answer to Concerns
Corning UESD’s OPEB prefunding story provides a great counter-point to two of the most common concerns raised by school districts during an OPEB trust discussion: (1) What good is prefunding if we can only contribute a fraction of our total unfunded liability? and (2) We don’t like being unable to access trust assets. With concern number one, contributing something as seemingly small as 0.5% of salary for a few years (which Corning UESD did) proved to be financially life-saving. With concern number two, it is simply a misnomer – Section 115 OPEB trusts allow for funds to be taken out (without penalty) to pay for OPEB-related expenses…. and Corning EUSD certainly is glad they had that option available to them.
To get answers to additional questions you may have about OPEB trusts, or to request a complimentary proposal, contact PARS at email@example.com.