2006 Higher Education Accounting Forum The California Community College Solution To GASB 45 Mike Brandy Vice Chancellor, Business Services Foothill De Anza Community College District

The California Community College System 109 colleges organized in 72 community college districts 1,095,000 Full Time Equivalent students 2,800,000 Headcount Decisions on salary and benefits are controlled in the local districts, but funding is controlled at the state level

How we got here Prior to 1978 district’s had separate taxing authority for operating funds including benefits Proposition 13 changed that and shifted funding to the state instead of local Most districts started offering lifetime benefits in this era District’s now feeling the effect of their staff aging and retiring along with double digit inflation in medical expenses

Changes are in the wind Most districts had not done actuarial analyses of the liability until the last few years GASB 43/45 now requiring that analysis Results of that analysis reflect major under funding problems

Steps to solutions Complete the actuarial analyses Educate the Board, employee unions and community about GASB requirements

Range of Solutions include…. Fully fund obligation from current funds –( very few districts able to do this) Structure financial plan to fund the difference between “pay as you go” and amortized obligation –Impact on enterprise funds and grants Issue Retiree Obligation Bonds (ROB’s) to fund the obligation –One district did this in December 2005

Internal dynamics The division between the “have” and “have not” active employees are creating challenging dynamics for re-allocating current dollars for future expenses Growing numbers and powers of retirees to protect their benefits

Controlling expense Controlling benefits costs through plan changes and cost shifting Modifying labor contracts to not offer to new employees (Almost all districts have now done this) –Still a significant number of active employees who will be joining the retiree pool

Challenges Taking money off the table for this obligation Realizing that the new generation of employees will not have the same benefits as their peers once had as active employees, and that they will carry much of the burden for retiree benefits, which they are not eligible to receive

Pressures to comply GASB does not “require” funding, but….. –Accreditation commission is now focusing on this issue –Public pressure in newspaper editorials and stories about scope of problem is increasing –Good business practice within the district will protect the long term solvency of the district

Pressures (continued) –The community college system wide chancellor’s office is requiring reports on funding plans –Legislative interest in forcing districts to identify funding plans has been expressed the last two years –Bond ratings could be lowered because of this long term unfunded liability

The Joint Powers Authority Trust as part of the solution Designed to provide guidance to districts on implementation and to provide resources such as RFP’s for actuarial services Designed to act as a retiree investment Trust to accept district money into an irrevocable trust, invest those dollars and disburse them for retiree benefits

The Trust (continued) Interest earning income is KEY assumption of actuary analysis Desire to leverage investment income to achieve higher earnings than available through County treasurers

The Trust (continued) 19 districts have already joined Board of Directors are the CBO’s of the districts who joined Formed by districts, governed by districts for the exclusive benefit of districts 5 different investment options are now offered including a short term liquidity pool and 4 portfolios of varying risk/return Founding documents approved, first cash to be accepted in April 2006.

Where are we going from here? Different districts will use different solutions Multi year paradigm shift for Boards of Trustees and employees to think of Retiree medical benefits in the same way as defined benefit contribution retirement plans

Where are we going from here? Reallocating precious operating dollars to this new liability item Controlling medical expense inflation to come close to the normal consumer price index rather than the double digit inflation we have experienced in last 5 years