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HomeMy WebLinkAbout110607 GASB 45 TRUSTOptions for Virginia Beach Options for Virginia Beach to Manage a GASB 45 Trust to Manage a GASB 45 Trust November 6, 2007 November 6, 2007 Today’s Agenda Today’s Agenda Overview of GASB 45 Liability Overview of GASB 45 Liability 1. 1. Overview of Requirements of a Trust Overview of Requirements of a Trust 2. 2. Options for Managing a Trust Options for Managing a Trust 3. 3. Need for Legislation Need for Legislation 4. 4. A trust fund is being considered for funding the A trust fund is being considered for funding the Retiree Healthcare Liability –GASB 45 Retiree Healthcare Liability –GASB 45 The City of Virginia Beach will most likely need to The City of Virginia Beach will most likely need to ? ? establish a trust for GASB 45 establish a trust for GASB 45 Creation of a trust will enable the City to use a higher Creation of a trust will enable the City to use a higher ? ? discount rate, which translates into a smaller liability discount rate, which translates into a smaller liability and a smaller ARC and a smaller ARC Benefits of an OPEB Trust Benefits of an OPEB Trust 2007 General Assembly granted authority to 2007 General Assembly granted authority to ? ? localities to create trusts to accumulate OPEB localities to create trusts to accumulate OPEB funds funds It allows OPEB assets to be invested to receive It allows OPEB assets to be invested to receive ? ? pension-like returns pension-like returns This allows investment earnings to offset a large This allows investment earnings to offset a large ? ? portion of the costs (70% of VRS pension portion of the costs (70% of VRS pension funding is from investment earnings) funding is from investment earnings) GASB 45 Liability Estimates * Unfunded 3%Funded 7.5% ($Millions) CITYSCHOOLSTOTALCITYSCHOOLSTOTAL Actuarial Accrued Liability $149.1$183.1$332.2$87.9$112.7$200.6 $332.2$200.6 Annual Required Contribution 16.723.139.812.016.7 28.7 28.7 Expected 2007 Costs 3.56.29.73.56.29.7 9.7 Cash Flow Increase 0.00.00.08.510.519.0 19.0 *To be updated Payments are considered to be an OPEB Payments are considered to be an OPEB contribution if: contribution if: Employer has made an irrevocable transfer of assets to the Employer has made an irrevocable transfer of assets to the 1. 1. plan (employer no longer has ownership or control of assets plan (employer no longer has ownership or control of assets except reversionary right once all benefits paid) except reversionary right once all benefits paid) The plan has been established as a trust –legally a separate The plan has been established as a trust –legally a separate 2. 2. entity under stewardship of a Board of Trustees or equivalent entity under stewardship of a Board of Trustees or equivalent Plan assets are dedicated to providing benefits to retirees and Plan assets are dedicated to providing benefits to retirees and 3. 3. their beneficiaries their beneficiaries Plan assets are legally protected from creditors of the employer Plan assets are legally protected from creditors of the employer 4. 4. or the plan administrator or the plan administrator Options for Investment Management of Options for Investment Management of Trust Assets Trust Assets Local Finance Board hires investment manager and Local Finance Board hires investment manager and 1. 1. advisor advisor Participate in a local option VML / VACo pooled Participate in a local option VML / VACo pooled 2. 2. trust which hires investment manager and advisor trust which hires investment manager and advisor Participate in a proposed local option VRS pooled Participate in a proposed local option VRS pooled 3. 3. trust (legislation required) where VRS is investment trust (legislation required) where VRS is investment manager manager Option #1 –Locality Creates and Option #1 –Locality Creates and Manages GASB 45 Trust Manages GASB 45 Trust A Finance board (or equivalent) is created to serve as A Finance board (or equivalent) is created to serve as ? ? Trustee and to manage and invest the assets of the Trustee and to manage and invest the assets of the Trust Trust Chief Financial Officer Chief Financial Officer • • Treasurer Treasurer • • Citizen with business experience Citizen with business experience • • Others as desired by City Council Others as desired by City Council • • Hires investment managers, advisors, actuary, etc. Hires investment managers, advisors, actuary, etc. ? ? Not liable for losses Not liable for losses ? ? “Prudent Person”Rule for investments “Prudent Person”Rule for investments ? ? Locality Creates and Manages GASB 45 Trust Locality Creates and Manages GASB 45 Trust Disadvantages Disadvantages Advantages Advantages City bears greater fiduciary City bears greater fiduciary Provided for under existing Provided for under existing 1. 1. 1. 1. responsibility responsibility law law Must create and oversee Must create and oversee Meets GASB 45requirements 2. 2. Meets GASB 45requirements 2. 2. Finance Board Finance Board Must hire investment manager, Must hire investment manager, 3. 3. actuary and other consultants actuary and other consultants through the RFP process through the RFP process Smaller trust since assets Smaller trust since assets 4. 4. would not be pooled with would not be pooled with other localities’OPEB or other localities’OPEB or pension assets pension assets Management fees likely to be Management fees likely to be 5. 5. higher higher Option #2 –VML / VACoto Manage a Local Option #2 –VML / VACoto Manage a Local Option Pooled Trust Option Pooled Trust Board of Trusteesto retain services of investment managers, Board of Trusteesto retain services of investment managers, ? ? investment consultants and custodial banks investment consultants and custodial banks VirginiaLocal Government Finance Corp (VLGFC) to carry VirginiaLocal Government Finance Corp (VLGFC) to carry ? ? out day-to-day administration of the trust, implement investment out day-to-day administration of the trust, implement investment instructions and coordinate investment managers as directed by instructions and coordinate investment managers as directed by Board of Trustees Board of Trustees Local Finance Boardto exercise voting rights, implement Local Finance Boardto exercise voting rights, implement ? ? investment decisions (e.g. investment mix), manage cash flow, investment decisions (e.g. investment mix), manage cash flow, and select other service providers (e.g. actuary) and select other service providers (e.g. actuary) VML / VACo Manage a Local Option Pooled Trust VML / VACo Manage a Local Option Pooled Trust Disadvantages Disadvantages Advantages Advantages Must still create and oversee Local Must still create and oversee Local Provided for under existing law Provided for under existing law 1. 1. 1. 1. Finance Board Finance Board OPEB assets pooled with those of OPEB assets pooled with those of 2. 2. Must hire an actuary and other service Must hire an actuary and other service other localities other localities 2. 2. providers not hired by the Board of providers not hired by the Board of Individual trust agreements not Individual trust agreements not 3. 3. Trustees Trustees required; joinderagreement instead required; joinderagreement instead VML and VACo are new to the trust VML and VACo are new to the trust 3. 3. Voting based on assets in the pool Voting based on assets in the pool 4. 4. and investment business and investment business Recordkeeping still at local level Recordkeeping still at local level 5. 5. Board of Trustees for pooled trust Board of Trustees for pooled trust 4. 4. Option #3 –VRS Invests Local Option #3 –VRS Invests Local OPEB Assets(Proposed) OPEB Assets(Proposed) VRS to be investment manager of local government OPEB trust VRS to be investment manager of local government OPEB trust ? ? funds funds Individual local trust agreement still required Individual local trust agreement still required ? ? MOU between each locality and VRS; VRS not a plan sponsor MOU between each locality and VRS; VRS not a plan sponsor ? ? Enrollment, recordkeeping, accounting, etc. to remain a local Enrollment, recordkeeping, accounting, etc. to remain a local ? ? responsibility responsibility Requires enabling legislation Requires enabling legislation ? ? Provides another option Provides another option ? ? Senate Bill 789 -2007 Senate Bill 789 -2007 Original bill granted VRS authority to invest local Original bill granted VRS authority to invest local ? ? OPEB funds OPEB funds This was stricken upon final passage This was stricken upon final passage ? ? House Appropriations Committee was concerned that VRS House Appropriations Committee was concerned that VRS ? ? or the state could be held liable for promises made to local or the state could be held liable for promises made to local employees by their employer employees by their employer VRS invests pension funds for each locality, and locality VRS invests pension funds for each locality, and locality ? ? pays full costs -therefore OPEB investment would be pays full costs -therefore OPEB investment would be the same the same Each locality would establish their own trust Each locality would establish their own trust ? ? documents, which should mitigate this concern documents, which should mitigate this concern VRS Investment Qualifications VRS Investment Qualifications Manages $58 billion in retirement assets Manages $58 billion in retirement assets ? ? $37.6 billion equities $37.6 billion equities ? ? $11.2 billion fixed income $11.2 billion fixed income ? ? $ 8.7 billion other asset classes $ 8.7 billion other asset classes ? ? Earned a 20.4% return in FY-07 Earned a 20.4% return in FY-07 ? ? 3-yr annualized return of 14.9% 3-yr annualized return of 14.9% ? ? 5-yr annualized return of 12.8% 5-yr annualized return of 12.8% ? ? Surpassed benchmark return of 18.5% in FY-07 Surpassed benchmark return of 18.5% in FY-07 ? ? Wilshire’s Trust Universe Comparison Service [TUCS] Report, Wilshire’s Trust Universe Comparison Service [TUCS] Report, ? ? places VRS in the upper 3 percent of public pension funds in places VRS in the upper 3 percent of public pension funds in fiscal year 2007 returns. fiscal year 2007 returns. VRS Management of Trust VRS Management of Trust OPEB funds are held in trust, but pooled with VRS OPEB funds are held in trust, but pooled with VRS ? ? funds for investing funds for investing Separate accounting of OPEB assets for each locality Separate accounting of OPEB assets for each locality ? ? Reasonable administrative fee to cover VRS’costs Reasonable administrative fee to cover VRS’costs ? ? VRS indemnified against investment losses so long as VRS indemnified against investment losses so long as ? ? funds invested according to the Prudent Person funds invested according to the Prudent Person principles principles VRS as Investment Manager of Local OPEB Assets VRS as Investment Manager of Local OPEB Assets Disadvantages Disadvantages Advantages Advantages Requires enabling legislation VRS is experienced and well Requires enabling legislation VRS is experienced and well 1. 1. 1. 1. qualified to invest OPEB assets qualified to invest OPEB assets Individual trust agreement required Individual trust agreement required 2. 2. Provides reliable, cost-effective Provides reliable, cost-effective 2. 2. investment option for Virginia investment option for Virginia localities localities No RFP process required; use VRS No RFP process required; use VRS 3. 3. existing consultants existing consultants Economies of scale should result in Economies of scale should result in 4. 4. lower investment management fees lower investment management fees Recordkeeping at local level Recordkeeping at local level 5. 5. Avoids creation of Local Finance Avoids creation of Local Finance 6. 6. Board Board Next Steps Next Steps Include local option for VRS as investment manager Include local option for VRS as investment manager 1. 1. of local government OPEB trust funds in of local government OPEB trust funds in Community Legislative Package Community Legislative Package Continue work identified for 2009 Health Care Plan Continue work identified for 2009 Health Care Plan 2. 2. Update actuarial study for GASB 45 Update actuarial study for GASB 45 3. 3. Return to Council for review of healthcare options Return to Council for review of healthcare options 4. 4.