1. Chapter 10Granof-5e1 Chapter 10 Fiduciary Funds and Permanent Funds

2. Chapter 10Granof-5e2 Thought to Ponder: Chapter 10 “The trust funds that the federal government has aren't the same as those you find in the private sector. You can't trust the federal government's and they aren't funded!” David Walker, former Comptroller General of the United States and President & CEO of the Peterson G. Foundation

3. Chapter 10Granof-5e3 Learning Objectives  Endowment  Permanent and Fiduciary Funds  Expendable and Nonexpendable Trust Funds  Accounting for these Funds  Accounting for Investment Gains and Losses  Pensions and the distinction between Defined Contribution and Defined Benefit Pension Plans  Accounting for Pensions  Accounting for postemployment health care benefits  Agency Funds

4. Permanent Funds (a governmental fund) 1) Accounts for nonexpendable resources 2) Resources benefit government 3) Measurement focus: Current Financial Resources 4) Basis of Accounting: Modified Accrual 5) Not all governmental entities have Permanent Funds and these funds may be major or non-major funds. 6) Funds included in government-wide statements Example: City of Boston, which has three non-major permanent funds. Chapter 10Granof-5e4

5. Fiduciary Funds (NOT a governmental fund) 1) Accounts for both nonexpendable AND expendable resources 2) Resources benefit outside parties (i.e. government is acting as a trustee for a beneficiary) Beneficiary examples: employees and their survivors, individual citizens, other governments etc. 3) Measurement focus: Economic Resources 4) Basis of Accounting: Full Accrual 5) Funds Excluded from government-wide statements. Chapter 10Granof-5e5

6. Chapter 10Granof-5e6 Fiduciary Funds Additional Information  4 major types: I) Private-Purpose Trust Funds II) Investment Trust Funds III) Pension Trust Funds IV) Agency Funds  Required Financial Statements -Statement of Fiduciary Net Assets -Statement of Changes in Fiduciary Net Assets

7. Chapter 10Granof-5e7 Endowment Fund  Definition: a contribution for which the donor requires that only the income from the investment may be expended, while the principal is preserved in perpetuity (i.e. remains intact.)  Endowments accounted for in nonexpendable fiduciary (or trust).  Endowment may also be accounted for in a permanent fund.  Examples of who maintains endowments: -Universities -Private foundations (Ford and Carnegie) -Churches and synagogues -Municipalities

8. Chapter 10Granof-5e8 Investment Income  Income from permanent (nonexpendable trust) funds is intended to benefit other funds.  Issue: should income be reported as A) revenue strictly in the receiving fund OR B) a nonreciprocal transfer-out from the permanent (nonexpendable) fund and a nonreciprocal transfer-in to the recipient (expendable) fund.

9. Chapter 10Granof-5e9 Investment Gains/Losses WITH Donor Stipulations:  ACTION: --Donors may stipulate whatever they want -- Usual stipulations are that gains be reinvested and not expended.  ISSUE: None.  REPORTING: Whatever is consistent with donor stipulations. --I.E. if donor stipulation or law mandates gains permanently restricted, then reported as additions to permanently restricted net assets --If donor stipulation or law mandates gains temporarily restricted, then reported as additions to temporarily restricted net assets.

10. Chapter 10Granof-5e10 Investment Gains/Losses (Cont’d) WITHOUT Donor Stipulations: ACTION:  Recipient can appropriate gains for current use. ISSUE:  In the absences of donor restrictions, should investment gains/losses be recognized as: A) Expendable income OR B) Nonexpendable principal REPORTING: (in the absence of donor restrictions)  GASB: --Gains: should be reported as unrestricted net assets --Losses: Unaddressed by FASB o Government may allocate losses between expendable & nonexpendable resources  FASB: (Conflicting Standards) o Page 405 Gains/Losses: report both as unrestricted net assets o Page 406 Losses: (2 steps) 1) Charge temporarily restricted net assets until it is depleted. 2) Charge remainder to unrestricted assets

11. Chapter 10Granof-5e11 Non-profits Vs. Government Non-profit:  Interest income and investment gains— reported in statement of activities as increases in temporarily restricted resources.  Interest income and investment gains are expendable.  Investment income is aggregated and reported on a single line.

12. Chapter 10Granof-5e12  Definition: To account for assets the government holds as an agent or trustee for individuals, organization, or other governmental units (a beneficiary).  Basis of accounting either A) Full Accrual OR B) Whatever basis is prescribed by state law or donor.  Investments: --GAAP requires that most be “marked to market” (i.e. reported at fair value) -- GASB Statement No. 31  Nonexpendable trust fund income: --Most states have adopted a version of either the Uniform Management of Institutional Funds Act or the Uniform Prudent Investors Act. --Permits a “prudent” portion of unrealized gains/losses to be used as distributable income. Trust Funds - Overview

13. Chapter 10Granof-5e13  Definition: Created by a donor for the benefit of an individual, organization, or other government (as opposed to one that benefits the government’s own program(s) or its citizenry).  May be either expendable or nonexpendable trust fund  Established for: Scholarships, Escheat property funds, Endowments for needy employees, NFP Historical societies, museums  Examples: The District of Columbia has a private purpose trust fund through which it “offers a tax-advantaged 529 College Savings Investment Plan (named after Section 529 of the Internal Revenue code). The plan is designed to help families save for the higher education expenses of designated beneficiaries and is available to DC residents as well as non-residents nationwide,” (CAFR, 2007). The city of Boston has several private purpose trust funds, one of which is used for scholarship awards, the purchase of educational equipment and the aid of needy students. I) Private-Purpose Trust Funds

14. Public (i.e. Governmental) Purpose Permanent Fund NOT a Fiduciary Fund If the government or its citizenry (i.e. Public) is the primary beneficiary, then account for the gift in either a “Public-purpose”: A) Permanent Fund –if the gift is nonexpendable B) Special Revenue Fund –if the gift is expendable Chapter 10Granof-5e14

15. Chapter 10Granof-5e15  Used to account for “investment pools.”  Used to account for the balance sheet and operating statement transactions affecting the external participants of a centrally managed investment pool.  A fund type created by GASB Statement No. 31 in 1997, Accounting and Financial Reporting for Certain Investments and for External Investment Pools.  Example: The City of San Francisco’s Investment Trust Fund accounts for the external portion of the Treasurer’s office investment pool, the funds of the San Francisco Community College District, San Francisco Unified School District, and the Trial courts. II) Investment Trust Funds

16. Chapter 10Granof-5e16 Pension trust funds are a(n):  Independent Entity  Legal Entity  Financial Entity  Accounting entity Liabilities of Pension Trust Fund:  Responsibility of the EMPLOYER The authoritative guidance for pension accounting and reporting is provided by GASB Statements:  Accounting for Pensions by State and Local governmental Employers (GASB Statement No. 27)  Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans (GASB Statement No. 25)  Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans (GASB Statement No. 26)  Pension Disclosures—an amendment of GASB Statements No. 25 and No. 27 (GASB Statement No. 50) III) Pension Trust Funds

17. Pension Trust Funds – Examples For the City of Houston Pension trust funds are used to account for the operation of the employee pension retirement programs. The funds include: Houston Firefighters’ Relief and Retirement, Houston Municipal Employees’, and Police Officers’ funds. The City of Chicago (CAFR 2006) has four single-employer defined benefit pension plans and eligible city employees participate in one of the four plans. These plans are the Municipal Employees’, the Laborers’ and Retirement Board Employees’, the Policemen’s and Firemen’s Annuity and Benefit Funds. The city of Atlanta has four Pension Trust Funds: General employees’ defined benefit pension fund, General employees’ defined contribution pension fund, Firefighters’ pension fund and Police officers’ pension fund. The District of Columbia, Washington D.C. has Other Postemployment Benefit trust fund (OPEB) along with two other Pension trust funds. Chapter 10Granof-5e17

18. Chapter 10Granof-5e18  Statement of Plan Net Assets (Table 10-5)  Statement of Changes in Plan Net Assets  Schedule of Funding Progress (Table 10-6)  Schedule of Employer Contributions (Table 10-6) Financial Reporting

19. Chapter 10Granof-5e19 GASB standards require note disclosures relating to: 1) The plan description and funding policy (including annual pension cost and the components of annual pension cost.) 2) Trends in annual pension cost and NPO. 3) Additional data that must be provided as part of required supplemental disclosures Financial Reporting(cont’d) Note Disclosures

20. Chapter 10Granof-5e20 Defined Contribution Plan  Employer makes series of pension contributions.  Employer defines inputs and contributions.  Employer reports annual expense for the amount obligated to contribute to pension fund.

21. Chapter 10Granof-5e21 Defined Benefit Pension Plan  Employer specifies the payments that the employee will receive.  Employer guarantees ONLY the outputs and not the inputs.  Interperiod equity: Pension costs must be allocated to the periods in which the employees perform services and earn pension benefits.  Amount to be contributed to meet future pension obligations are calculated by actuaries. --Actuarial method: allocation of total cost of expected benefits over the total years of employee service.

22. Chapter 10Granof-5e22  GASB standards provide guidance for defined benefit plans that are either: (1) included as part of an employer's financial report OR (2) included in stand-alone reports  GASB Standards distinguish between two categories of pension information: (1) current financial information about plan assets and activities and (2) actuarially determined information about the funded status of the plan and progress in accumulating assets Defined Benefit Pension Plans (cont’d) Financial Reporting

23. Chapter 10Granof-5e23  Annual Pension Cost A calculated amount of the employer's periodic cost.  Annual Required Contributions (ARC) Employers required contribution to a defined benefit pension plan, calculated in accordance with certain parameters.  Actuarial deficiencies (excesses) Difference between the annual required contributions and the actual contributions  NOTE: GASB said that a government’s annual pension cost should be based mainly on its annual required contributions. Key Terms

24. Chapter 10Granof-5e24 Net Pension Obligation (NPO) Cumulative difference measured from the effective date of the new statement between  the annual pension cost and  the employer's contributions plus (minus)  any transition pension liability (asset) and excluding (a) short-term differences and (b) unpaid contributions that have been converted to pension-related debt. Transition liability/asset is based on funding relative to prior actuarial requirements--retroactive application of the new requirements is not necessary Key Terms (cont’d)

25. Chapter 10Granof-5e25 GASB pension accounting standards apply not only to general purpose government employers but also to:  government-owned or affiliated healthcare entities,  colleges and universities,  public benefit corporations and authorities,  utilities, and  pension plans themselves if they are also employers. GASB standards provide guidance for:  Pension expenditures/expenses  Pension liabilities and assets  Required supplementary information  Note disclosures GASB requires that the pension plans include:  Plan assets, liabilities, and net assets available for benefits  Changes in Net assets  Contribution requirements of employers and employees  Funded status of plan Accounting – Overview

26. Chapter 10Granof-5e26 Annual Required Contribution (ARC) is calculated each period and consists of the following 2 components: 1) Actuarial present value of total projected benefits  i.e. "normal costs" based on the particular actuarial method used  any of several actuarial methods is acceptable Accounting (cont’d) Annual Required Contribution

27. Chapter 10Granof-5e27 2) Amortization of Unfunded Actuarial Accrued Liability  May use either of 2 methods which are both based on projected payroll: A) Level Dollar Amounts OR B) Level Percentage Amounts  For amortization of the total unfunded actuarial liability, the amortization period must not exceed 40 years.  10 years after the effective date of the Pension Plan standard, the maximum period drops to 30 years  For amortization of any significant decrease in the unfunded actuarial liability resulting from changes in actuarial method, a minimum amortization period of ten years is imposed. Accounting (cont’d) Annual Required Contribution (cont’d)

28. Chapter 10Granof-5e28 If more than one fund contributes to a plan, the government must apportion the ARC-related contributions to each fund.  NPO (a reduction/addition to ARC), must be allocated between business-like and governmental activities based on proportionate share of beginning balance of NPO Accounting (cont’d) – Annual Required Contribution (cont’d)

29. Chapter 10Granof-5e29 NPO allocated to governmental funds:  If NPO is positive: --Then it should be reported as a liability in the government- wide statement of net assets  If NPO is negative: --Then it should first be used to reduce any previous liability to the same plan, and secondly, any excess should then be reported as an asset in government-wide statement of net assets. NPO allocated to proprietary funds  If NPO is positive: --Then it should be reported as an asset  If NPO is negative: --Then it should be reported as a liability Accounting (cont’d) – Net Pension Obligation (NPO)

30. Chapter 10Granof-5e30  This is an adjustment to ARC calculated by using the same amortization method, actuarial assumptions, and amortization period used in determining the ARC for that year.  If NPO b is positive (a funding deficiency), the adjustment is a deduction from ARC  If NPO b is negative (a funding excess), the adjustment is an addition to ARC  Regardless of whether NPO b is positive or negative, it is referred to as an “Unfunded Actuarial Liability.” Accounting (cont’d) – NPO b

31. Chapter 10Granof-5e31 Employer pension expenditures/expense may include one or both of the : 1) ARC Contributions AND/OR 2) Payments of pension-related debt (not included in ARC or NPO). Accounting (cont’d) – Pension Expense/Expenditure

32. Chapter 10Granof-5e32  Benefits, such as health care for retirees, may represent a material liability.  GASB: The disclosure requirements in notes and supplementary schedules are similar to those for pensions.  2 basic statements are required: --Statement of plan net assets --Statement of changes in plan net assets  If the OPEB is administered by a defined benefit pension plan, it follows the standards set forth in GASB Statement No. 26 (and GASB Codification Sec. P.50)  Financial reporting is similar to those for a defined benefit pension plan. Other Postemployment Benefits (OPEB)

33. Chapter 10Granof-5e33 Purpose:  To account for assets held by a governmental unit acting as an agent for one or more other governmental units, individuals, or private organizations (i.e. custodial in nature)  Use an agency fund if: o Dollar amount of transactions dictate use of agency fund for accountability reasons o Its use will improve financial management or accounting o Mandated by law, regulation, or GASB standards Assets = liabilities  Since it is held on behalf of another party, all assets it has, are someone else’s. IV) Agency Funds

34. Chapter 10Granof-5e34 The City of Houston Agency funds include: Payroll Revolving, City Deposits, and Tax Clearing Funds. The City and County of San Francisco has seven different Agency funds (Assistance Program Fund, Deposits Fund, Payroll Deduction Fund, State Revenue Collection Fund, Tax Collection Fund, Transit Fund, and Other Agency Funds). Agency Funds – Examples

35. Chapter 10Granof-5e35  Special assessment accounting when the government is not obligated in any manner for special assessment debt  Tax Agency Funds --Very common usage  Pass-through agency funds --(but not as common since GASB Statement 24 on grant accounting was issued). Note: Agency fund generally not needed for routine agency relationships such as payroll withholding Agency Funds – Typical Uses

36. Chapter 10Granof-5e36  The Clinton County tax collector acts as property tax collection agent for Delta City, the Delta R-5 Consolidated School District, and the County Library. Delta City and the school district are charged a 1% collection fee which is passed to the county's general fund as revenue.  The levy for the year for the General Fund of each governmental unit was $500,000, which was $250,000 for Delta City (50%), $150,000 for the school district (30%), and $100,000 for the Library (20%) Tax Agency Funds -Example 1

37. Chapter 10Granof-5e37 At the time of tax levy: County Tax Agency Fund:Dr. Cr. Taxes Receivable for Other Funds and Units $ 500,000 Due to Other Funds and Units 500,000 Example 1 (cont’d)

38. Chapter 10Granof-5e38  Assuming each governmental unit estimates that 4% of taxes levied will be uncollectible: Delta City General Fund:Dr.Cr. Taxes Receivable-Current 250,000 Estimated Uncollectible Current Taxes 10,000 Revenues 240,000 Delta R-5 CSD General Fund: Taxes Receivable-Current 150,000 Estimated Uncollectible Current Taxes 6,000 Revenues 144,000 County Library General Fund: Taxes Receivable-Current 100,000 Estimated Uncollectible Current Taxes 4,000 Revenues 96,000 Example 1 (cont’d)

39. Chapter 10Granof-5e39  During the first six month of the year, $400,000 was collected from current taxes. Calculate the amount to be distributed to each governmental unit. Fund/Unit Levy Amt % of levy Amt Due * Fees Net Due Delta City $250,000 50% $200,000 $(2,000) $ 198,000 R-5 C.S.D. 150,000 30% $120,000 (1,200) 118,800 Library 100,000 20% 80,000 80,000 County GRF 3,200 * Amount due is $400,000 X Percentage of Levy Example 1 (cont’d)

40. Chapter 10Granof-5e40  The following entries are required in the County Tax Agency Fund to record the collection and allocation. Clinton County Tax Agency Fund: Dr. Cr. Cash $400,000 Taxes Receivable for Other Funds and Units 400,000 Example 1 (cont’d)

41. Chapter 10Granof-5e41 Following entry in the agency fund shows the allocation of collected amounts to each participating fund and unit. Clinton County Tax Agency Fund: Dr. Cr. Due to Other Funds and Units $400,000 Due to Delta City 198,000 Due to R-5 CSD 118,800 Due to County Library 80,000 Due to County GRF 3,200 Example 1 (cont’d)

42. Chapter 10Granof-5e42 When the County Tax Agency Fund disburses the amounts due to each governmental unit, it would make the following entry: Clinton County Tax Agency Fund: Dr. Cr. Due to Delta City $198,000 Due to R-5 CSD 118,800 Due to County Library 80,000 Due to County GRF 3,200 Cash 400,000 Example 1 (cont’d)

43. Chapter 10Granof-5e43 Upon receipt of the amounts due each government Delta City General Fund: Dr. Cr. Cash$198,000 Expenditures2,000 Taxes Receivable-Current 200,000 Delta -5 CSD General Fund: Cash$118,800 Expenditures1,200 Taxes Receivable-Current 120,000 County Library General Fund: Cash $ 80,000 Taxes Receivable-Current 80,000 County GRF Cash $ 3,200 Revenues 3,200 Example 1 (cont’d)

44. Chapter 10Granof-5e44  Used only if the intermediate (“pass through”) government has NO administrative involvement or direct financial involvement in the grant.  The pass-through government must simply be acting as a conduit before an agency fund is used.  GASB NO. 24: -- A government accounts for proceeds of pass-through grants in an agency fund ONLY if it merely transmits funds without any administrative involvement. --If government has administrative involvement, it accounts as revenues and expenditures/expenses. Pass-Through Agency Funds

45. Chapter 10Granof-5e45  There are three types of trust funds I) Private-Purpose Trust Funds II) Investment Trust Funds III) Pension Trust Funds  All trust funds essentially follow full accrual basis.  Accounting and financial reporting requirements for defined benefit pension plans and the related employer requirements are complex, relying on actuarial estimates for much of the information reported.  Agency Funds are used only for significant agency relationships in which a governmental units acts as an agent for another party. Summary