May
2019
This Spring, Address Your Pension Liability and Growing Rates with Pension Prefunding Trust
Categories: California Developments,PARS News,Pension Rate Stabilization
The coming of spring signifies a time for many annual activities, and in the local government world it is no different with the need to finalize budgets for next fiscal year.
As those discussions and decisions are being worked through this season, we wanted to take the opportunity to send out a reminder – don’t forget about proactively addressing your pension liabilities and growing pension contribution rates.
Setting aside money (prefunding) into an Internal Revenue Code (IRC) Section 115 trust, such as through the PARS Pension Rate Stabilization Program (PRSP), is a financially healthy step towards managing long-term rising pension liability.
The PARS PSRP is an innovative, IRS and GASB approved IRC Section 115 trust designed for public agencies to prefund pension costs and address rising pension contribution rates. The Program allows agencies to securely set aside funds, separately and apart from their retirement system, in a tax-exempt funding vehicle to mitigate long-term contribution rate volatility. Participating agencies maintain local control over assets held in the trust and can determine the appropriate investment goals and risk tolerance level with specifically designed low-cost investment pools. It also creates a rainy-day fund that can be accessed at any time to reimburse an agency for its ongoing pension costs.
What other factors encourage agencies to take action on their unfunded liabilities:
- GASB – released Statement 68 to require pension liabilities be noted directly on balance sheets
- CA Government Code – allows for an irrevocable, exclusive benefit trust to diversify its asset investments in order to potentially achieve a greater rate of return than the general fund (Section 53216.1)
- Credit Agencies – have been known to look favorably on ratings when agencies show they’re proactively prefunding liabilities
- IRS – has reviewed the PARS Trust and issued a Private Letter Ruling (PLR) which assures the tax-exempt status of the investment
LOOKING TO ALSO CLEAN UP YOUR OPEB LIABILITY?
Through PARS, public agencies also have the ability to prefund OPEB/retiree health care benefits in the same trust. Each is accounted for separately, with assets aggregated for lower fees.