FUND 73 ACCOUNTING AND MANAGEMENT WITH CHANGING BENEFITS Marc Duff, Deputy Chief Financial Officer Racine Unified School District Michele Gundrum, School Finance Auditor Wisconsin Department of Public Instruction

Changing Benefits, Changing Fund 73 2

What’s in Fund 73?  OPEB - Valued in actuarial study  Wide variety of benefits included  Supplemental Stipend Type Pension - Valued in study  Traditional Pension - Separate valuation (only a few districts have this, similar to WRS)  Fully funded HRAs  Active employee current use  Active employee for use during retirement  TSAs  Prefunded Termination Benefits 3

Traditional OPEB and Supplemental Stipend 4

Traditional OPEB-Stipend  OPEB and Supplemental Stipend Type Pension benefits - Valued in actuarial Study  THREE MAJOR SEPARATE CASH TRANSACTIONS!  DO NOT MINGLE THEM!  NO NETTING!  Contribution to the Trust  Payment of Retiree Benefits from Trust  Implicit Rate Subsidy (also retiree benefit) 5

Contribution to the Trust 6  Expenditure is charged to Object 218 and allocated to the active employees fund, function and project  Contributions to the trust need to be physical CASH movement IN FULL from district to trust FundFunctionObj/SrcProject DebitxxExxxxxx218xxx CreditxxB Cash Contribution from district to Fund 73 trust

Contribution to the Trust 7  Variation would be to record Due To (812000) payables and Due From receivables (714000) throughout the year.  If contribution exceeds the ARC, the amount in excess is not allocated to active employees and is not eligible for categorical aid or federal grants  All 10E OR  Allocated between funds and still  District determines amount to contribute  Amount of retiree benefits may help determine amount, but completely separate transaction

Payment of Retiree Benefits - Option 1 8  All retiree benefits funded into the trust must be paid from the trust  Option 1 - If a district is able to pay vendors directly from the trust: FundFunctionObj/Src Debit73E Credit73B Payment of retiree benefits to vendor

9  District can choose to have Fund 10 pay the benefits throughout the year, but Fund 73 MUST pay Fund 10 back IN CASH and IN FULL.  Keep the transactions clean!!!!!  NOT a district expenditure. Never make the retiree benefit payment any 2xx Object. Should be set up as a Due From Fund 73 receivable. Payment of Retiree Benefits - Option 2

10 FundFunctionObj/Src Debit10B Credit10B Payment by district to insurance vendor for retiree benefits. Set up receivable from Fund 73 FundFunctionObj/Src Debit73E Credit73B Record payable to the district for reimbursement of retiree benefits from trust Payment of Retiree Benefits - Option 2

Implicit Rate Subsidy  Implicit Rate Subsidy is an expenditure of the trust (retiree benefit) if retirees are on the district’s health insurance plan, UNLESS  Self-funded and trust pays actual medical costs  ETF State Group Health Plan - Community Rated  Plan premiums rated separately for retirees  Immaterial as determined by actuary  Fund 73 trust must pay the district IN CASH and IN FULL for the Implicit Rate Subsidy. 11

Implicit Rate Subsidy  Implicit rate subsidy is paid to the district and reduces the healthcare costs of active employee plan members with health insurance.  Credit Object 241, MUST BE ALLOCATED to employee fund, function and project  Even if no contribution that year, implicit rate subsidy payback applies.  Implicit rate subsidy calculation includes any amounts paid directly from retiree to insurance company. Sample of Activity was updated.  Do not use amount from study, must be applied to actual health and long term care insurance costs. 12

13 Sample of Activity - Exhibit A Sample of Activity - Exhibit B

Implicit Rate Subsidy 14 FundFunctionObj/Src Debit73E Credit73B Payment to district for Implicit Rate Subsidy FundFunctionObj/SrcProject DebitxxB CreditxxExxxxxx241xxx Cash received from Fund 73 Trust for Implicit Rate Subsidy  Allocated as a credit to active employee healthcare premiums, Object 241, to the active employee’s fund, functions and projects.

15  Retiree may pay a portion of their premiums.  CASH is not district funds and should be deposited directly into trust (Option 1, next slide)  If the district can’t deposit directly into trust, cash should go into a Due to Fund 73 liability account and be paid IN CASH and IN FULL to the trust. (initially recorded as Option 2, next slide) Retiree paid portion of benefits

16 FundFunctionObj/SrcProject Debit10B Credit10B Retiree Portion of Premium payable to Fund 73 FundFunctionObj/SrcProject Debit73B Credit73R952 Retiree Portion of Premium deposited into trust OPTION ONE OPTION TWO

Traditional OPEB-Stipend Guidance 17  Employee Benefit Trust Fund webpage  Recent Communications (this presentation and letters to districts)  Benefit Trust Fund Requirements  Special Ed Categorical Aid Eligibility Worksheet  Sample of Activity  Account Descriptions and Sample Entries 

Traditional Pensions 18

Traditional Pension  Only a few districts have this, similar to WRS  Contribution into the trust based on actuarial study  Contribution is Object 218, fund, function and project of active employee plan members. Must be allocated!!!  Revenue into the Fund 73 trust is Source 953  Payment of retiree benefit expenditures from Fund 73 trust is Object 992  Therefore, total Object 218 should equal the sum of 73R R

HRAs 20

HRA differences  HRA/HSA document lists all scenarios under Payroll And Benefits   HRA is valued in actuarial study  Accounting follows traditional OPEB  At retirement, district will put $1,000 into an HRA for each year worked, but does not put the full $1,000 into the trust every year. Unfunded liability exists. Also could fund, but not allocated under employee’s name in HRA account. 21

HRA differences  HRA is fully funded when earned  MUST GO INTO IRREVOCABLE ACCOUNT  District puts away $1,000 in each year an employee works for use at retirement. The full $1,000 is funded every year and is allocated and held in the HRA account in the employee’s name. Obligation is fully funded and will not be valued in the actuarial study.  Allocated to employee fund, function and project!!!!  Earnings belong to trust - can pay fees or be allocated to employee accounts 22

HRA payment to trust for active employees future use in retirement  Allocated to each employee’s individual fund, function and project and object 219.  Held in HRA account in each person’s name 23 FundFunctionObj/SrcProject DebitxxExxxxxx219xxx CreditxxB Payment to the trust for current employee HRA to be used at retirement

HRA payment to trust for active employees current medical costs  The trust agreement allows for non-OPEB transactions.  Allocated to each employee’s individual fund, function and project and object FundFunctionObj/SrcProject DebitxxExxxxxx249xxx CreditxxB Payment to the trust for current employee HRA

HRA payment to trust for retirees current medical costs (pay as you go)  The trust agreement allows for non-OPEB transactions.  Expenditure for retired employees to use for current medical costs.  This was not prefunded into the trust while active employee 25 FundFunctionObj/SrcProject DebitxxE None/019 CreditxxB Payment to the trust for retirees HRA (pay as you go)

 The activity in Fund 73 for all HRAs that are not valued in the OPEB study is the same. 26 FundFunctionObj/SrcProject Debit73B Credit73R955 Receipt of district payment to trust for HRAs not valued in study Debit73E Credit73B Payment of HRA medical costs from the trust for HRAs not valued in study Fund 73 HRA Activity -not valued in study

HRA Guidance 27  WUFAR Accounting Issues and Coding Examples  Under Payroll and Benefits 

Other Benefits in Fund 73 28

Other Benefits in the Trust  TSAs  If not in actuarial study, fully funded in year earned. Object 219, allocated to employee fund, function and project Revenue into the Fund 73 trust is Other Contributions Expenditure out of Fund 73 trust is Object TSA/Misc  Prefunded Termination Benefits - See Compensated Absences - Prefunding under Payroll and Benefits  Carried on Balance Sheet until termination benefits paid out. Expenditure occurs upon termination 

Reminders, New Guidance 30

OPEB Trust Activity 31  All transactions with the trust need to be CASH TRANSACTIONS  Contributions to the trust need to be physical cash movement from district to trust in full.  Payment of Implicit Rate Subsidy needs to be physical cash movement from trust to the district in full.  Benefits must be paid with physical cash movement from the trust in full.  NO NETTING!!!

Deadlines  Contribution to the trust must be physically transferred to trust by July 30 to be counted as an expenditure for the year just ending on June

Fund 73 gains and losses  Book unrealized gains and losses  Fund 73 only  Object Unrealized Losses on Investments Object 998 is used to recognize the decrease in value of the Fund 73 investment. Used with Fund 73, function only. Realized losses are coded to Object 964.  Source Unrealized Gains on Investments Source 957 is used to recognize the increase in value of the Fund 73 investment. Realized gains are coded to Source

Benefits must be budgeted 34  Contribution for all benefits should be budgeted.  Amount of contribution is a decision by the district.  In some years, a district may not have a contribution at all. In these cases, there are enough funds in the trust that retiree benefits are still paid from the trust.

PI-1202 Reporting  Benefits  ALL 200 object codes!!  All prefunded retirement benefits are allocated to active employees and must be included in the 1202 Report - In general, all 21X should tie to active employees WRS OPEB Trust Contributions TSA Contributions HRA’s that are fully funded in the year earned Any other active employee benefit  Implicit Rate Subsidy credit to 241 Use budgeted amounts 35

Terminating Use of Trust  Deplete the funds in the trust by paying out benefits  Consider if district isn’t making contribution, and just using trust, could impact shared costs.  District may spread closure out over a few years and still make some contribution to reduce impact on shared costs  Notify DPI that you have depleted trust funds and won’t be using it anymore.  Contact your legal counsel about the dissolution of the trust 36

37 District Perspective Through Payroll

Example of Fiscal Benefit of Using OPEB Trust  For RUSD, about 32% of OPEB costs can be attributed to federal grants or state categorical aid. Finite Funds – taken away from other use Additional State Aid – outside the cap Since 2007 RUSD has set aside $7.2 million in the F73 OPEB trust. 38

Method of Payroll Deduction 39  In discussing payroll deduction method with districts, most used a flat percent of payroll spread across all regular employees.  Others do not use a payroll deduction method while other districts are phasing out their OPEB trust.  Method of payroll deduction should be reasonably related to the employees eligible for the post employment benefit.

Setting Up OPEB System Through Payroll  OPEB is set up as a benefit (Object 218)  Determine payroll employer paid deduction method - Should be reasonably linked to OPEB benefit received (Health coverage, HRA, retirement supplement, etc.) 40

Payroll Deduction Calculation Decisions 41 GOAL IS FOR AN ACCURATE RATE  Before calculating the OPEB payroll deduction percentage, decide what is the goal of the contribution. - Pay-as-you-go cost plus 5%? - Higher contribution to reduce OPEB liability? - Lower amount due to 3 year rolling average for eligibility?  Assumptions to use in calculation - Compensation adjustments - Vacancy impacts - Benefit adjustments

Challenges – OPEB Payroll method 42  The payroll deduction method for generating the OPEB amounts will not be exact (e.g. vacancies, adjusted benefits, self-funded cost, retiree costs/drops, etc.)  Adjustments need to be spread across all 218 accounts  As a self-insured district, actual costs for retirees may not be known before the July 30 Fund 73 cash deposit deadline  Need to reconcile the district payroll system requirements with the detailed OPEB transaction requirements

Resources and Contact Michele Gundrum, School Finance Auditor or  Benefit Trust Fund page:   WUFAR Accounting Issues and Coding Examples 