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CHAPTER 8: ACCOUNTING FOR FIDUCIARY ACTIVITIES AGENCY AND TRUST FUNDS
Answers to Questions
8-1. Although in law there is a clear distinction between an agency relationship and a trust relationship, in practice the legal distinctions are not sufficient to classify funds as agency funds or trust funds. All factors, such as the enactment that created the fund and pertinent regulations, must be examined to determine the nature of the fund and the transactions in which it may engage. Generally, trust funds are more complicated than agency funds, requiring greater representation and development of the beneficiary’s interest.
8-2. There are many different types of trust funds. For reporting purposes the GASB classifies trust funds as investment trusts, private-purpose trusts, and pension trusts (also referred to as pension and other employee benefit trusts). An investment trust fund is used to account for and report the fund equity in pooled investments held by fund participants who are external to the government operating the fund. Private-purpose trust funds record and report principal and/or interest managed by a government for the benefit of an individual, private organization, or another government. The distinguishing characteristic is that the party benefiting from the trust must be external to the government operating the trust. In pension and other employee benefits trusts a government is managing benefits that belong to government employees. As can be seen, in each case the government is acting as a fiduciary, or in the best interest of parties outside the government.
8-3. The GASB standards require two financial statements (a statement of plan net position and a statement of changes in plan net position) and two schedules of historical trend information (a schedule of funding progress and a schedule of employer contributions) for pension financial reporting. In addition, notes to the financial statements and notes to the required schedules disclose a number of descriptive items, including a plan description, a summary of significant accounting policies, and description of contributions and reserves.
8-4. When an agency fund is used to account for assets, the assets belong to the party or parties for whom the government acts as an agent, and not to the government itself. Thus, agency fund assets are offset by liabilities equal in amount and no fund equity exists.
8-5. A pass-through agency fund is one wherein a level of government (such as the state government) serves as an intermediary, transferring resources to another level of government (such as local government). For a pass-through agency fund to be appropriate the government acting as the conduit must have no administrative or direct financial involvement. If the pass-through government provides monitoring, is involved in determining eligibility of fund recipients or programs, has discretion in allocating funds, or finances some direct program costs a pass-through agency fund is not appropriate.
Ch. 8, Answers (Cont'd)
8-6. With an internal investment pool the pool participants are all within the same government. While accounting for an internal investment pool often occurs in an agency fund; for external financial reporting purposes each participant reports its proportionate share of the pooled assets and liabilities. The agency fund of an internal investment pool is not reported in external financial statements.
The accounting for an external investment pool differs in the type of fund used and the manner in which the pool’s assets and liabilities are reported. An external investment pool is reported in an investment trust fund and has participants that are outside the government administering the investment pool. As such, the GASB standards require that a trust fund be used to account for the investment pool’s resources. External participants’ shares of net position of the fund and additions to and deductions from net position are reported in the investment trust fund. Those participants have no claims on specific assets of the trust.
8-7. The GASB standards require that realized and unrealized gains and losses be reported in aggregate as “Change in Fair Value of Investments,” which is a component of investment income. While gains and losses are not reported as separate amounts in the financial statements, they may be disclosed in the notes to the financial statements, if desired. Governments may maintain a separate Allowance for Changes in Fair Value of Pooled Investments account (a contra-asset account) to record all changes in fair value rather than increasing and decreasing the balance of the investment accounts.
8-8. The beneficiaries of a private purpose trust are individuals, organizations, or governments other than the government administering the trust; whereas, the beneficiary of a public purpose trust is the government administering the trust. Since the beneficiary of the private purpose trust is outside the administering government, the administering government has a fiduciary responsibility to the beneficiary and as a result the private purpose trust is reported as a private-purpose trust fund. A public purpose trust is generally reported as either a permanent fund (i.e., the principal must remain intact) or a special revenue fund (i.e., the income and/or principal may be spent for a specified purpose).
8-9. Three indicators that are useful in assessing the financial health of a pension plan are the unfunded actuarial accrued liability, the funded ratio, and the difference between the required contribution and the amount actually contributed. Information about the unfunded actuarial accrued liability and the funded ratio can be found on the schedule of funding progress. If the unfunded actuarial accrued liability is growing or the funded ratio is decreasing over time it indicates that sufficient resources are not being provided to cover the benefits earned by employees. The schedule of employer contributions
Ch. 8, Answers, 8-9 (Cont'd)
provides information on the percentage of the required contribution that has actually been contributed to the plan. If actual contributions are not keeping pace with the required contributions the plan’s actuarial accrued liability will continue to grow. Thus, the two required schedules provide useful information in assessing the financial health of a pension plan. The health of a plan is best determined by looking at the trend in the information rather than looking at a single year.
8-10. A government employer reports pension expenditures in a governmental fund on the modified accrual basis of accounting. Thus, the amount recognized will be the actual amount contributed to the plan during the year regardless of pension cost. In proprietary funds and in the governmental activities journal at the government-wide level, employers would recognize the pension cost on the accrual basis. Therefore, if the amount contributed to the pension fund for the year is less than the annual pension cost, the difference should be added to net pension obligation (NPO). If the contribution is greater than the annual pension cost, the difference should be deducted from the NPO.
Solutions to Cases
8-1. a CalPers was established by state law in 1932.
b. Almost all types of state and local government employers contribute to CalPERS, including state agencies, cities, special purpose governments, and schools.
c. Over 1.6 million California public employees, retirees, and their families are served by CalPERS.
d. CalPERS administers 15 funds:
• 7 pension trust funds 4 of which are for defined benefit plans and 3 of which are for defined contribution plans
• 1 OPEB fund.
• 3 agency funds an old age survivors fund, a special deposits fund for earmarked funds, and a contingency reserve fund for health care payments and remittances.
• 4 proprietary funds one long-term care fund, one deferred compensation fund, and two health care funds
e. The total value of fiduciary assets will vary with the most recent financial report. The information can be obtained from the statement of fiduciary net position.
f. The change in pension fund net position will vary with the most recent financial report. The information can be obtained from the statement of changes in pension net position. (Recall that agency and proprietary fund information would not be reported on a statement of changes in fiduciary net position.)
g. Refer to the most recent financial report’s required supplementary information –schedule of funding progress. Funding ratios vary greatly by plan and year. For some of the time periods reported, you will find a funded ratio greater than 100%, while other ratios are much less than 100%. A ratio less than 100% indicates that the actuarial value of the liabilities is greater than the actuarial value of the assets, resulting in an under funded pension as of the valuation date.
Ch. 8, Solutions, Case 8-1 (Cont'd)
h. CalPERS is a fiduciary component unit of the State of California. Thus, it is blended with other pension financial information in the state’s statement of fiduciary net position and statement of changes in fiduciary net position, and is not reported at all in the government-wide financial statements.
8-2. Following are answers based on the 2010 fiscal year CAFRs for the City and County of Denver and New York City. The answers to the questions will vary with the year of the CAFRs examined; therefore, the answers provided serve as a guide to what should be considered in the analysis.
a. For 2010 the DERP Health Benefits plan AAL was $141,643,000. Over the period from 2008 to 2010 the funded ratio has somewhat declined. There was about a 6 percent decline from 2008 to 2009, and since that time the funded ratio had a net decline of about 5.4 percent. If the DERP Health Benefits plan is compared to the DERP (which is the pension plan) we see that the pension plan is better funded than the Health Benefits Plan. The funded ratio for the pension has ranged from 88.4 percent to 98.2 percent during the four year time period, while the Health Benefits Plan has ranged from 63.8 percent to 75.0 percent.
b. The most recent year for which the AAL was calculated (2007) indicates a liability of $62,135,453,000 for the New York City Health Benefits Plan. For the same time period the funded ratio is 4.2 percent. Over the period from 2005 to 2007 the funded ratio ranged from 0 to 4.2 percent.
c. Based on the data available, it would appear that Denver has funded a relatively greater percentage of its health benefit plan than New York City. As a result, the future financial burden and cost related to the currently earned benefits may not be as great for Denver as for New York City. The size of the programs and economic factors also play a role in each city’s ability to fund its plans.
8-3. a. As defined on the issue brief’s website, defined benefit plan provides governmental employees with lifetime retirement income based upon years of service and final average salary. Defined contribution plans are similar to individual retirement savings accounts where the investments are selected by the employee from a list of options provided by the plan. The benefit at retirement depends on the value in the employee’s account. Under a defined benefit plan, the government – hence taxpayers – bear responsibility for future benefit payments, as well as market and inflation risk. Defined contribution plans shift all the risk and responsibilities from the employer to the employee.
A hybrid plan combines elements of both defined benefit plans and defined contribution plans. They are intended to spread the risks associated with the pension payments between the employer and the employee. In some cases employees are required to participate in both a defined benefit and a defined contribution plan.
