Today, Governor Brown signed Senate Bill 1413 (Nielsen) which provides the California Public Employees’ Retirement System (CalPERS) the authority to establish the Pension Prefunding Trust Program (PPTP).
Public agencies that utilize the PPTP established through SB 1413 will receive the benefits of being able to offset their unfunded pension obligation by an amount equal to their balance in the trust, the ability to smooth annual CalPERS rate adjustments by drawing on the trust, increase the diversity of their investments beyond general fund investments, and potentially improve their bond ratings.
The PPTP allows CalPERS to establish, in accordance with Section 115 of the Internal Revenue Code (IRC), an irrevocable trust (115 Trust) through which California public agency employers may prefund their future annual pension contributions. The PPTP will also provide an additional option for employers to pay down their unfunded liability as part of a defined benefit plan. A 115 Trust is exempt from taxation under Section 115 of the IRC; set up to benefit from the same tax-exempt status of the governmental employer who establishes and adopts the trust. Under CalPERS, the PPTP allows public agencies to direct funds into the 115 Trust that can only be used to meet pension obligations once deposited in the trust.
Although 115 Trusts are currently available to public agencies through the private market, agencies will benefit from a CalPERS managed trust through reduced overhead and fees, streamlined transfers from the fund to CalPERS to pay for pension obligations, and an established working relationship.
The creation of the PPTP at CalPERS may ultimately provide for financial reporting benefits as well. Current Governmental Accounting Standards Board (GASB) reporting guidelines allow for contributions to a 115 trust to be footnoted as an offset to unfunded liabilities. However, once the 115 trust is established at CalPERS, we believe CalPERS will be able to work with GASB to allow contributions to a 115 trust, managed by a public retirement system, to directly reduce unfunded liabilities required to be reported under GASB 68. This change will serve to build public confidence in the public pension system and will reduce overall unfunded pension liabilities statewide.
Should you have any questions about this newly signed legislation please feel free to contact CSDA's Senior Legislative Representative, Dillon Gibbons, at dillong@csda.net.
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