Public Pension Challenges: The Role of the Section 115 Trust in Risk Mitigation and Strategic Financial Planning

12 Sep 2023

Strategic financial management in local government revolves around the intricate balance of maximizing revenues and judiciously controlling expenses. This delicate equilibrium is crucial for enabling transparent, future-oriented financial planning, providing for resiliency, and ensuring consistent financial resources for improving levels of services provided to citizens. To safeguard this balance, risk mitigation becomes imperative, acting as a protective shield against unforeseen financial disruptions, especially those posed by the volatility in public pension systems.

Public pension systems are a wildcard in developing a long-term financial plan. Investment portfolios that target investment returns toward unrealistic discount rate assumptions are forced to diversify, blending traditional assets with more risky alternatives such as private equity, private debt, and real estate.

While diversification is intended to hedge against losses, it simultaneously introduces layers of unpredictability. This volatility makes it challenging to project long-term fiscal trends accurately.

Amidst this backdrop, the Section 115 Trust emerges as a crucial counterweight. Rather than merely reacting to the tumultuous waters of investment risks, the trust offers local governments a lifeline, mitigating the volatility and creating a steadier path forward. For those at the helm of local governance, this tool is less a luxury and more a necessity, ensuring that strategic financial planning remains anchored, no matter the investment climate.

But how can a Section 115 Trust, such as the one offered by PARS, act as a robust mechanism for risk mitigation?

  1. Counteracting Dependence on High Returns: As public pension plans may feel the pressure to delve deeper into riskier assets to achieve high returns and meet a discount rate which is often 6-7%, a Section 115 Trust provides a counterbalance, offering a more conservative investment approach that can temper overall portfolio risk.
  2. Providing a Buffer: The trust serves as a reservoir during economic downturns or when liquidity is a concern, ensuring consistent pension payouts without the need to draw money away from other resources or hastily liquidate illiquid assets at unfavorable prices.
  3. Investment Strategy Flexibility: With potentially different, and perhaps more conservative investment guidelines, a Section 115 Trust offers another avenue for diversification, further spreading risk.
  4. Maintaining Fiscal Equilibrium: By preemptively addressing future liability increases, governments can achieve a stable fiscal environment, ensuring continuity in public services.
  5. Asset Protection: Shielding assets from creditors is vital, especially when delving into riskier investment avenues. A Section 115 Trust ensures that the funds allocated for pensions are insulated from other financial adversities.
  6. Enhanced Oversight: Regular audits and stringent governance mechanisms ensure that the funds within the trust are being managed effectively, providing all stakeholders with transparency and clarity.

In Summary

In the complex landscape of public financial management, two concepts emerge as cornerstones: responsibility and trust. It’s not just about hitting numbers or achieving short-term gains; it’s about creating a legacy of sound financial stewardship that benefits both current and future generations.

Responsible financial management isn’t just a buzz phrase—it’s a commitment. It means making informed decisions, understanding the implications of the risk inherent in public pensions, and being proactive in seeking out tools and strategies that fortify the local government’s financial position. When public pension plans dive into areas like private equity, private debt, and real estate, it requires local government financial managers to provide a safety mechanism to counterbalance inherent risks. That’s where the PARS Section 115 Trust shines as a beacon.

The trust does more than just provide a fiscal safety net; it’s a testament to foresight and prudence. When stakeholders see that measures like the Section 115 Trust are in place, it instills confidence. It sends a message that the organization isn’t just looking at the here and now but is genuinely invested in the long-term welfare of its beneficiaries. It’s this type of forward-thinking that cultivates trust, turning abstract financial concepts into tangible security.

For anyone navigating the nuances of public pension management into their strategic financial management strategy, the integration of a Section 115 Trust shouldn’t just be a consideration—it should be a top priority. In embracing this tool, we’re not merely managing rainy-day reserve funds; we’re building a foundation of trust and responsible governance that will stand the test of time. In an era where uncertainty is a given, let’s champion certainty by making choices today that safeguard our tomorrow.