Employee Benefit Fund (Fund 73) Requirements

Date: June 29, 2007

To: Interested Parties

From: Kathy Guralski, School Finance Auditor

Subject: Employee Benefit Fund (Fund 73) Requirements

This document provides current DPI requirements concerning establishment of a benefit trust by school districts for post-employment benefits. Post-employment benefits are benefits paid to employees after the retirement date, resulting from services rendered during employment. Post employment benefits include pension and non-pension benefits such as health benefits. Financial information in a school district annual report to the department, relating to these benefits, must be based on the accounting system prescribed by the State Superintendent per s. 115.28 (13) of WI Statutes.

These requirements apply to all post-employment benefit plans where the district is providing for such benefits by contributions to a legally established irrevocable trust. Unless a school district has established such a trust, post employment benefits are reported as a cost when payment for the benefit is made. This is a "pay as you go" method, in contrast to recording cost "when earned," that is, recording a cost as employees are providing services to the district. Upon establishment and funding of such a trust, a district has elected to no longer record cost on the “pay as you go” method and therefore, all current retiree costs are paid by the trust, not by general operating funds. In the first year that a trust is established and funded, your district may have expenditures reported both on the “pay as you go” and “when earned”. In this initial year, any payment to current retirees made with general operating funds (“pay as you go”) is considered a contribution applied against current year liability, but not considered costs eligible to be charged to federally funded financial programs or state categorical aid.

The department recognizes that post-employment benefits may represent a significant liability that must be funded. The department also acknowledges that it is fiscally appropriate to have the cost and funding recognized and provided for such benefits as they are earned. The Wisconsin Uniform Financial Accounting Requirements "WUFAR" for school districts has a separate accounting fund, "Employee Benefit Trust Fund" (Fund 73) for reporting resources set aside and held in a trust arrangement for post-employment benefits.

The following are conditions and considerations in the use of the Employee Benefit Trust Fund:

1. The post-employment benefits accounted for in the Fund must result from a contractual agreement as compensation for employee services (which may include enhanced or additional benefits to encourage early retirement). The district's obligation to pay for the benefits must accumulate during employment although the actual benefits are provided and payment for the provided benefits does not occur until after employment.

2. The school board must agree, in a formal, legally constituted trust agreement to establish a trust to hold and disburse resources set aside for the post-employment benefits. Employees eligible for benefits paid through the trust shall be notified that they may obtain a copy of the trust agreement upon request. The department must be provided with a copy of the trust agreement and board minutes approving the establishment of the trust.

3. Physical segregation of trust assets must be made. The Trust Fund may not be merely an accounting shell consisting of a fund on the district's accounting records. Actions that might be construed as merely an accounting shell are making a contribution to the trust and immediately withdrawing the entire amount for retiree benefits or netting contributions to the trust with retiree benefits paid. An example of netting contributions would be cutting a check to the trust for $300,000 when the actual contribution is $500,000 and the payment of current year retiree benefits is $200,000. The $500,000 contribution would need to be made from the district to the trust and the trust would need to make payment of the benefits. Trust Fund assets cannot be used for purposes other than to provide benefits for which the trust was established. An employer may amend or terminate the trust, but no assets may revert to the employer unless all liabilities have been satisfied.

4. The department, in establishing accounting and reporting requirements for post-employment benefits, is not making a legal determination as to the authority of the school district to provide a particular benefit, nor is it making a limitation on benefits that the district has authority to provide.

5. A written opinion must be obtained from legal counsel when establishing a trust, that the trust as established is within the authority of school board. This opinion must state that the trust complies with applicable state statutes, federal laws and regulations. This opinion must be obtained prior to any contribution made to the trust. The department must be provided with a copy of this opinion.

6. The district must consult with appropriate professionals regarding Internal Revenue Service and other regulatory agencies filing and reporting requirements applicable to the trust. The district shall determine that the trust has met all such requirements.
7. The Wisconsin Employment Relations Commission must be consulted on issues concerning the effect of providing and costing post-employment benefits on qualified economic offer calculations.

8. Individuals performing the trustee role for the Fund must be informed that they have a fiduciary responsibility concerning transactions of the Fund.

9. Contributions to the Trust Fund shall be as per contractual agreements if such agreements specify that the district make required contributions to a legally established trust.

10. The Codification of Governmental Accounting and Financial Reporting Standards (GASB Cod. Sec. P20) issued by the Governmental Accounting Standards Board, "GASB," has identified acceptable cost methods to determine the annual required contribution (ARC) necessary to fund government employee benefit plans on an actuarial method. The department must be provided with a copy of the actuarial annual required contribution or other acceptable cost method calculation. For plans with a total membership of 200 or more an actuarial annual required contribution must be performed at least biennially from the date first used. For plans with a total membership of fewer than 200 an actuarial annual required contribution or other acceptable cost method calculation must be performed at least triennially from the date first used.

11. The United States Office of Management and Budget, in OMB Circular A-87, has established the standards for determining costs eligible to be charged to federally funded financial programs. Post employment benefit costs calculated using an actuarial method recognized by generally accepted accounting principles are allowable if the payments are to be made to a trustee to maintain a Trust Fund or reserve for the sole purpose of providing post-employment benefits. Contributions in a fiscal year that are less than the actuarially determined ARC amount may be eligible to be claimed against federal programs dependent upon program regulations. Eligible costs are to be allocated to Federal awards and all other activities in a manner consistent with the pattern of benefits attributable to the individuals or group(s) of employees whose salaries and wages are chargeable to such Federal awards and other activities.

12. State special education categorical aid, per WI statute 115.88(1), high cost special education categorical aid, per WI statute 115.888, and state tuition categorical aid, per WI statute 121.79 are based on prior year expenditures incurred. These expenditures include salary related costs for specified staff employed. Under WI Statute 115.88(13), the state superintendent has the authority to prescribe a uniform financial fund accounting system which provides for the recording of all financial transactions inherent in the management and administration of the state’s school aid programs. For a contribution to be allocated to employees as a salary related cost and become aid eligible, the contribution must meet the following requirement.

For fiscal year ending June 30, 2007, contributions less than or equal to the ARC determined amount will be eligible for state categorical aid (special education, high cost and state tuition) administered by the DPI. To be eligible the following apply:

a. Circular A-87 requires federally funded programs to have employee costs accorded consistent treatment with non-federally funded activities. Eligible costs are to be allocated to special education and all other activities in a manner consistent with the pattern of benefits attributable to the individuals or group(s) of employees whose salaries and wages are chargeable to such categorical awards and other activities.

For fiscal years ending on or after June 30, 2008, contributions less than or equal to the ARC determined amount MAY be eligible for state categorical aid (special education, high cost and state tuition) administered by the DPI. To be eligible the following apply:

a. Circular A-87 requires federally funded programs to have employee costs accorded consistent treatment with non-federally funded activities. Eligible costs are to be allocated to special education and all other activities in a manner consistent with the pattern of benefits attributable to the individuals or group(s) of employees whose salaries and wages are chargeable to such categorical awards and other activities.

b. Contributions made in first fiscal year for which the trust is
funded may be less than or equal to the ARC determined amount but may not exceed ARC. Contributions made in second fiscal year for which the trust is funded, and each year thereafter, MUST meet at least one of the following criteria:

i. equal the ARC amount as determined by actuarial valuation
ii. exceed current year expenditures paid from trust by 5% (expenditures will be determined by the total amount withdrawn from the trust for retirees inclusive of implicit rate subsidy)
iii. combined with previous two year contributions exceed current year expenditures combined with previous two years expenditures paid from trust by 15% (expenditures will be determined by the total amount withdrawn from the trust for retirees inclusive of implicit rate subsidy)

13. The following contributions to the trust fund are to be reported as "Other Support Services" (function 290 000) and an employee benefit (200 series object):

13.1. Contributions determined by using a "terminal" method where the currently determined value of an individual's future benefits is contributed to the Trust Fund at the time of employment termination, retirement or benefit commencement.

13.2. Contributions, although computed on the basis of the ARC, that are made only for a selected group of employees eligible for the benefit. An example is making a contribution to the Fund based on the ARC for special education employees only.

13.3. Contributions in excess of the ARC to the extent that an unfunded liability exists. Contributions in excess of an unfunded liability must be recorded as a deferred charge against future year contributions.

14. Contributions of amounts which are eligible for state special education categorical aid are to be reported as an employee benefit (218 object) code and associated with the function account corresponding to the activities of the employee. This should be done for all benefit eligible employees and will permit the benefit contribution to be claimed against categorical aided programs.

15. The district must fund contributions (i.e. make payment to the trust) by June 30, for the fiscal year then ended.

16. Effective for fiscal years ending on or after June 30, 2008, no withdrawals from the trust may be made for retiree benefits paid by the general fund prior to the date the trust was established. Only benefits paid to current retirees on or after the date the trust was established may be paid from trust funds.

17. All contributions, for which a liability exists, that are made to a post-employment benefit trust in accordance with the provisions of this letter and charged to the district's General Fund will be an aided cost as computed under the current equalization aid formula.

18. The audited financial statements must contain note disclosures that the GASB has identified as minimum disclosure requirements for financial statements presented in accordance with generally accepted accounting principles.

19. The requirements identified in this letter are subject to future revision to be in compliance with state and federal legal requirements and with GASB pronouncements.

20. Copies of the following information must be provided to Kathy Guralski, Wisconsin Department of Public Instruction, 125 South Webster Street, P.O. Box 7841, Madison, Wisconsin, 53707-7841:

20.1. Most Recent Actuarial Valuation or Other Acceptable Cost Method Calculation
20.2. Employee Benefit Trust Agreement and any amendments
20.3. Legal Opinion
20.4. Board Approval

Please contact Kathy Guralski (608) 266-3862 or Lori Ames (608) 266-3464 with any questions regarding this information.

Original 4/6/04
Revised 12/6/04
Revised 12/21/05
Current Revision 6/29/07

For questions about this information, contact dpifin@dpi.wi.gov (608) 267-9114

Last updated on 2/25/2008 12:03:57 PM