1. Essentials of Fund 73 WASBO Accounting Seminar March, 2009 Presented by: Kathy Guralski, School Finance Auditor Wisconsin Department of Public Instruction

2. How does establishing a Fund 73 affect State Aid? Equalization aid Pay as you go Retiree payments are an expenditure for shared cost Trust Shared cost does not include the retiree payments RATHER Shared cost includes the total amount of the contribution to the trust less the implicit rate subsidy on current benefits paid retirees

3. How does establishing a Fund 73 affect State Aid? Equalization aid (cont.) Trust Example: Contribution of $500,000 Expenditure for shared cost Retiree benefits of $300,000 No impact on shared cost – paid from trust Implicit rate subsidy of $100,000 Paid from trust to District because it has already been funded by the active employees Reduces expenditure for shared cost Amount that impacts shared cost is $400,000

4. How does establishing a Fund 73 affect State Aid? State Categorical Aid Pay as you go No impact Trust Contribution amount less implicit rate subsidy may be allocated to individual functions as a fringe benefit IF: Intent to fund the trust is shown DPI measures that intent with 3 criteria

5. State categorical aid eligibility requirements One of three criteria must be met Contribution must equal ARC amount Contribution in current year must be 105% of the expenditures paid from the trust in the current year Combined contributions for the current year plus the previous 2 years must equal 115% of the combined expenditures paid from the trust in the current year plus the previous 2 years.

6. State categorical aid eligibility requirements Example: Current year contribution $500,000 ARC $600,000 Does not meet the 1 st criteria

7. State categorical aid eligibility requirements Example: Current year contribution $500,000 Retiree benefits including implicit rate subsidy $300,000 $300,000 X 105% = $315000 Contribution does meet the 2 nd criteria

8. State categorical aid eligibility requirements Example: Current year contribution $500,000 Previous two year contributions $300,000 total Current year retiree benefits including implicit rate subsidy $300,000 Previous two year retiree benefits including implicit rate subsidy $590,000 total $300,000 X 105% = $315,000 $290,000 X 105% = $304,500 $300,000 X 105% = $315,000 Total = $934,500 Total Contributions = $800,000 Contribution does not meet the 3rd criteria

9. State categorical aid eligibility requirements If none of the three are met, no allocation of the contribution is made and there is no impact on state categorical aid In this example, criteria 2 has been met so the entire $500,000 of contribution is allocated (object 218) and reduced by the implicit rate subsidy of $100,000 (object 240)

10. State categorical aid eligibility requirements

11. CONTRIBUTION IN EXCESS OF ARC How should a contribution that exceeds the ARC be accounted for? Treat the amount up to the ARC the same as meeting the ARC Excess must be accounted for as function 290000, object 218

12. CONTRIBUTION IN EXCESS OF ARC How should the implicit rate subsidy when the contribution exceeds the ARC be accounted for? Example: ARC - $500,000 Contribution $600,000 Implicit Rate Subsidy - $200,000. 100% of implicit rate subsidy is allocated to individuals Implicit rate subsidy has no connection to the amount of the contribution

13. Should our District establish a FUND 73 Trust? Can our District afford the minimum 5% required each year to receive additional categorical aid? How is our district aided for general aid? Negative territiary? Run the numbers How much categorical aid will I received? Example: Contribution is $200,000 of which 15% is special education salaries and benefits If this is aided at 28.5% Additional categorical aid of approximately $8,550

14. Should our District establish a FUND 73 Trust? How will the District pay for these benefits in the future? How will not funding impact bond rating? What is the legal cost of establishing a trust? What are the yearly administrative costs associated with a trust? If you do not plan to fund the trust with more than the current year pay as you go, these are additional cost with possibly little to no benefit

15. SEGREGATED FUNDS Physical segregation of trust assets must be made. Assets are titled in the trust name Never pooled cash Never part of investment pool in districts name Must be available to pay benefits Contributions are physical movement of funds from the District assets to the trust assets Payments of benefits are physical payment from the trust assets

16. ACCOUNTING FOR FUND 73 ACTIVITY What do you need to have in front of you to properly account for district contribution and the trust activity? Actuary study Total insurance cost of current year retirees Portion of insurance cost paid by retirees versus district Group of employees to which benefit is offered FTE or salaries by individual for the group of employees

17. Determining how to Account for fund 73 activity Follow the steps! Collect general information Exhibit A Calculate implicit rate subsidy on retirees Exhibit B Determine whether the contribution is eligible for state categorical aid Exhibit C Allocation of contribution Exhibit D

18. Allocation of Contribution Run through payroll Example 1 – Exhibit D The budgeted amount of $5724.12 would be divided by number of pay periods Included as a fringe benefit Credited to a liability account until time contribution is made to trust Credited to a prepaid account if contribution made prior to the payroll

19. Allocation of Contribution Run through payroll Example 1 – Exhibit D Contribution made July 1 for $500,000 Prepaid Expense Cash Expenditure recorded through payroll Individual function object Prepaid Expense

20. Allocation of Contribution Run through payroll Example 1 – Exhibit D Contribution made June 1 for $500,000 Liability account Cash Expenditure recorded through payroll Individual function object Liability account

21. Allocation of Contribution Run through payroll Year end should reflect actual contribution. If the contribution is different at year end than budgeted, a year end adjustment needs to be made. That can be done either with the last payroll or as a year end journal entry. Journal entry Can do the allocation as a journal entry versus run through the payroll

22. Accounting for fund 73 Follow the steps! Account for contribution to trust Exhibit E Account for retiree contribution towards insurance Exhibit F Retiree benefits paid from trust Exhibit G Summary of transactions per account Exhibit H

23. Self-funded Insurance Contribution Based on premium equivalency plus implicit rate subsidy Retiree Benefits Generally the actual costs are paid from the trust (no need to account for implicit rate subsidy because the actual costs are being paid)

24. Self-funded Insurance What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? Premium equivalency at beginning of year $200 Actual costs incurred during the year $190 Adjustment at year end to reflect actual cost ($10)

25. Self-funded Insurance What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? It may be hard to determine the actual costs by June 30 th Contribution to the trust is due June 30th The 5% is a minimum requirement to show intent

26. What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? Example: Year 1: Premium equivalency - $500, Actual cost - $490 Year 2: Premium equivalency - $500, Actual cost - $550 Year 3: Premium equivalency - $550, Actual cost – $525

27. What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? Example: Year 1 ARC $800,000 Contribution $525,000 ($500,000 x 105%) Actual retiree payments $490,000 Meets the 2 nd criteria of additional 5%

28. What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? Example: Year 2 ARC $800,000 Contribution $525,000 ($500,000 x 105%) Actual retiree payments $550,000 Does not meet any of the 3 criteria

29. What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? Example: Year 3 ARC $800,000 Contribution $577,500 ($550,000 x 105%) Actual retiree payments $525,000 Meets the 2 nd criteria of 5% Premium was increased

30. ? Could you increase the contribution every 3 years to have a cushion? Example: Year 1: Premium equivalency - $500, Actual cost - $490 Year 2: Premium equivalency - $500, Actual cost - $550 Year 3: Premium equivalency - $550, Actual cost – $525

31. Could you increase the contribution every 3 years to have a cushion? Example: Year 1 ARC $800,000 Contribution $595,000 ($500,000 x 105% plus a cushion of $70,000) Actual retiree payments $490,000 @105% = $514,500 Now it’s 21% additional but still below ARC Meets the 2 nd criteria of additional 5%

32. Could you increase the contribution every 3 years to have a cushion? Example: Year 2 ARC $800,000 Contribution $595,000 ($500,000 x 105%) Since there is not 3 years yet, will add another $70,000 cushion Actual retiree payments $550,000 @ 105% = 577,500 Now it’s 8% additional but still below ARC Meets the 2 nd criteria of additional 5%

33. Could you increase the contribution every 3 years to have a cushion? Example: Year 3 ARC $800,000 Contribution $577,500 ($550,000 x 105%) Now there is 3 years and there is $98,000 cushion from the 2 prior years Actual retiree payments $525,000 Three year contributions $1,767,500 Three year retiree payments @ 105% $1,617,000 Now meets the 2 nd and 3rd criteria

34. Criteria does not change for self- funded it just becomes harder to determine CONTRIBUTION MUST BE MADE BY JUNE 30 TH TO BE AN ELIGIBLE COST

35. QUESTIONS? Kathy Guralski School Finance Auditor 608-266-3862 kathryn.guralski@dpi.wi.gov