CalPERS’ Pension Prefunding Program Proposal Moves Forward
February 19, 2016
The California Public Employees’ Retirement System (CalPERS) Board of Administration (Board) today approved the sponsorship of legislation to implement the California Employees’ Pension Prefunding Trust (CEPPT).
Currently, CalPERS only offers employers the option to prefund their Other Post-Employment Benefits (OPEB) liabilities; the CEPPT would allow employers to prefund their future annual pension contributions and provide an additional option to pay down unfunded liabilities.
The CEPPT would be in accordance with Section 115 of the Internal Revenue Code, which provides that income of a trust − that is derived from the exercise of governmental function that accrues to the entities exempt from taxation − is excludable from gross income. Under the newly-implemented Governmental Accounting Standards Board (GASB) 68, employers can’t offset pension liabilities with assets over which the employer retains discretionary control and can redirect to other purposes. CalPERS’ creation of an irrevocable IRC Section 115 trust would provide employers with the opportunity to reduce their net pension liabilities for GASB 68 reporting purposes.
CSAC staff testified to the CalPERS Finance and Administration Committee this week in support of the creation of a program; however, we noted significant concern with a proposal by labor representatives to include language in the legislation that would require “mutual agreement” between the employer and employee groups before the employer could contribute funds to the pension prefunding trust. Such an impediment to an agency’s ability to fund future obligations and pay existing debts is contrary to a governing board’s commitment to create a healthy, sustainable budget for its residents.
CSAC will keep counties apprised of any movement on this legislation. For more information, please contact Faith Conley at 916.650.8117.