County Building Trust

September 6, 2007
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GRAND RAPIDS — Because of a change in accounting standards, Kent County recently got the wheels in motion to establish a Voluntary Employees Benefit Association (VEBA) trust to pre-fund medical insurance coverage for current and future retirees.

The Governmental Accounting Standards Board (GASB), which sets financial reporting requirements for public sector entities, has mandated that administrators report how they plan to fund future employee benefits. Previously, GASB only required information on how current benefits were being funded.

So to meet the new requirement, county commissioners authorized the administration to create a VEBA trust — but not in the traditional sense. For its purposes, the county is using the trust as a tax-exempt vehicle.

“We’ve determined our liability for retiree health insurance benefits, both the outgoing costs and the unfunded past-service liability,” said Robert White, Kent County fiscal service director.

The unfunded past-service liability is a future charge for benefits that employees have earned in the past. For instance, workers who have been on the job for, say, 10 years have earned benefits they can collect when they retire, and GASB requires the county to expense those benefits when they are earned and not just when the benefits are paid.

“So if you promise something for the future, just to put off an expense, you can’t do that. If you made an irrevocable promise, you have to start recognizing that liability. GASB said you don’t have to fund that liability, but you do have to recognize it,” said White.

“The county has decided it will recognize it and it will fund it,” he added.

The county’s unfunded past-service liability is $48 million, which requires the county to make a contribution this year of $2.9 million to the fund. That payout is equal to about 3 percent of the county’s payroll this year.

To some, Kent’s liability may sound like a huge amount but it’s actually much lower than most governmental units because the county hasn’t made as many promises to its employees as other units have.

The past-service liability for the city of Grand Rapids tops $100 million.

So what is the county doing with that $2.9 million? Instead of depositing those dollars in the county’s investment pool, the money is going into the VEBA trust. State law limits the type of investments counties can make to things like certificates of deposit that return about 5 percent. But GASB gives the county more investment options, as long as the money is solely dedicated to paying future retiree benefits.

“Under state law you have greater latitude on how those monies can be invested, and the law is synonymous with the laws governing pension plans in the state. You can make investments in stocks, in bonds and in money-market instruments,” said White.

“Because of that, it allows you to assume a higher return on the investment rate for those assets, generally in the range of 7 to 8 percent. So if you assume you can earn more in the future, then you are required to put away less. So you want to put it into the irrevocable trust.”

The county began depositing 3.1 percent of every payroll into a treasurer’s receivable account at the start of this year. The funds stayed there until the county board established the VEBA trust in June; then the money was deposited into a bank account designated to the trust.

The trust will be managed by a five-member board that will meet soon to adopt an investment policy the county will follow.

Kent County Administrator and Controller Daryl Delabbio, Treasurer Ken Parrish and White will be on the board with Pension Administrator Michelle Valcom and Office of Community Development Auditor Matt Madonna.

Although this year’s amount going into the trust is $2.9 million, White believes that figure will rise in the years ahead.

“I expect it will probably go up because the costs of health insurance go up, so therefore our future liability will continue to increase,” he said. “If medical costs continue to go up faster than payroll, the percentage will go up.”    

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