What Can Be Done to Deal With CalSTRS & CalPERS Rate IncreasesCategories: California Developments,PARS In the News,Pension Rate Stabilization
School Services of California, Inc. by Suzanne Speck & Kathleen Spencer, March 16, 2016
Q. School Services of California, Inc., (SSC) has warned local educational agencies (LEAs) that we will soon be in a cost-of-living adjustment (COLA) only environment. At the same time, we will be facing continued increases in pension obligations. It isn’t looking like a legislative solution is in sight. What can we do to deal with the California State Teachers’ Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS) contribution rate increases?
A. First, we do believe that we will soon be in a COLA-only environment and that the increased demands on an LEA’s base funding (e.g., pension contributions, the cost of step and column increases, and increases in health benefit obligations) will outpace those COLAs. This squeeze on the base will erode the purchasing power of LEAs. But there are things schools can do now to manage their pension obligations, especially in light of the significant one-time discretionary dollars being provided from the state.
The first option LEAs might consider is setting aside cash for future pension contributions in a separate fund earmarked for that purpose. Based on several recent Internal Revenue Service (IRS) Private Letter Rulings, LEAs now have the option of setting aside funds in a multiemployer trust.
Last year, a water district in Southern California obtained approval from the IRS to use an Internal Revenue Code Section 115 trust concept, the IRS vehicle commonly used for other postemployment benefits (OPEB) or retiree healthcare funding, to set aside funds for future CalPERS cost increases. Shortly thereafter, the Public Agency Retirement Services (PARS) received an IRS ruling for a multiple employer trust based on the same concept. Today, LEAs, as well as cities, counties, and special districts around the state, are setting aside funds in PARS’ Pension Rate Stabilization Program.
The advantages of this approach are that funds are contributed into an irrevocable trust, which enables greater investment flexibility and risk diversification than typical LEA investing, secures the funds from diversion to nonpension uses, and provides a locally controlled “rainy day” fund to access as future budgetary and fiscal needs dictate. Funds in such a trust are considered assets on financial statements to offset the Governmental Accounting Standards Board No. 68 Net Pension Liabilities now required to be disclosed. CalPERS recently surveyed public agencies about their interest in such a trust program (61% expressed interest), but opted not to develop a program itself for the time being.