PARS, PRSP and the Power of PrefundingCategories: California Developments,PARS News,Pension Rate Stabilization
The Public Retirement Journal by Amy Brown, April 19, 2016
With pensions being the hot button topic of the moment, and the very real reality of maturing public pension plans, over $1 trillion dollars across the US in unfunded liabilities, expected greater contribution fluctuations from year to year, the rigidity and volatility of state and county systems, and the rising rates and costs outside local agency control associated with pension benefits looming, we’ve asked public retirement experts, PARS (Public Agency Retirement Services), by way of PARS Executive Vice President Mitch Barker, to weigh in on the matter. This well-respected, innovative company established over 30 years ago to exclusively serve public agencies, has, true to form, introduced a new, first-of-its-kind solution to the marketplace that may be just the thing we’ve all been waiting for… a real game-changer.
If a radical slash and burn of your agency’s future retirement benefits or a Waterloo-esque retreat from your current obligations isn’t right for you and your constituents, read on.
What is the PARS PRSP?
The PARS Pension Rate Stabilization Program (PRSP) is a GASB-compliant, exclusive IRS-Private-Letter-Ruling-Approved Section 115 Trust solution established by PARS to provide public agencies a previously unavailable, secure way to set aside funds, separate and apart from state or county retirement systems to reduce pension liabilities and stabilize pension costs. Public agencies will maintain local control over assets held in the trust and are able to diversify investments to protect and potentially maximize assets held in the trust.
The concept is simple. Agencies can establish the PRSP with PARS and any assets they place in the trust can be accessed at any time to pay for any pension-related costs, unlike monies sent directly to the state or county systems. Per new GASB standards, assets in the trust would reduce an agency’s Net Pension Liability (NPL), unlike assets held in the general fund.
What do you mean by “prefund”?
As far as we’re concerned, this just really means to prepare in advance for costs and obligations that you know are coming and increasing over time. Prefunding allows you to take advantage of compounding earnings and the other benefits available through a tax-exempt trust. We often call the effect of prefunding pension through the PRSP, “the power of prefunding”. And in the sense of our program that’s really true. You are making a more powerful impact on your pension obligations by taking advantage of this program than if you just keep assets in your general fund or make larger payments directly to your state and county programs.
What inspired this concept?
There’s a lot to navigate when it comes to managing pensions. Public agencies have to adhere to the strict standards set by GASB in Statement 68 for recognizing deferred outflows and inflows of resources; expenses and expenditures; and — this is the big one — they have to recognize and report their Net Pension Liability (NPL) on the face of their financial statements. We saw that for many, if not most, of the issues agencies face related to managing pensions, there were only limited and inflexible solutions available to them.
Seeing that pension rates from CalPERS and CalSTRS are set to increase substantially; many agencies confirmed the need for a program like this. Public agency leaders needed sound options, provisions and help navigating all these things, we knew we could provide it.
You have an exclusive Private Letter Ruling from the IRS, what does this mean?
That took us over a year to secure, but we felt it was important. What that means is the IRS has reviewed our plans for the trust and has released an exclusive letter providing that our trust is approved for the purpose of prefunding pensions separate and apart from the state/county retirement system through a tax-exempt trust.
What are some of the real-world results you’ve seen as a result of agencies taking advantage of this program?
One agency in Northern California, for example, with just their initial contribution into the trust, lowered their actuarial accrued liability by 30 percent. They are also earning a higher rate of return versus their prior holdings. The trust was able to produce a lower overall Net Pension Liability figure, resulting in further cost savings and credit worthiness. With the PRSP trust, the agency has created a safe and secure, more robust rainy day fund than a general fund or state/county system alone could provide.
Some agencies are able to continue putting funds in their trust, as this agency has, which only helps them increase the advantages of the trust. Others are not able to contribute much or very often, but are able to make contributions at anytime in the future when economic conditions improve.
Lowering risk, increasing value, and making public money go the distance, now that’s good governance.