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Chapter 10

Fiduciary Funds

and

Permanent Funds

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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

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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 under current standards• New Pension Standards, GASB Stds No 67 and 68• Accounting for postemployment health care benefits• Agency Funds

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Permanent Funds (a governmental fund)1) Accounts for nonexpendable resources2) Resources benefit government3) Measurement focus: Current Financial Resources4) 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, has three non-major

permanent funds.

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Fiduciary Funds (NOT governmental funds)

1) Account 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 Resources4) Basis of Accounting: Full Accrual5) Funds excluded from government-wide

statements.

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Fiduciary FundsAdditional Information

• 4 major types:I) Private-Purpose Trust FundsII) Investment Trust FundsIII) Pension Trust FundsIV) Agency Funds

• Required Financial StatementsoStatement of Fiduciary Net Assets oStatement of Changes in Fiduciary Net Assets

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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:o Universitieso Private foundations (Ford, Carnegie, Gates)o Churches and synagogueso Municipalities

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Investment Income &Investment Gains/Losses

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.

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Investment Gains/LossesWITH Donor Stipulations:• ACTION:o Donors may stipulate whatever they want.o Usual stipulations are that gains be reinvested and not

expended.• ISSUE: None.• REPORTING: Whatever is consistent with donor

stipulations.o I.E. if donor stipulation or law mandates gains

permanently restricted, then reported as additions to permanently restricted net assets.

o If donor stipulation or law mandates gains temporarily restricted, then reported as additions to temporarily restricted net assets.

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Investment Gains/Losses (Cont’d)WITHOUT (absence) donor or legal stipulations:

• ACTION:o Recipient institution can appropriate gains for current use.

• ISSUE: o In the absence of donor restrictions, should investment gains/losses be

recognized as:

A) Expendable income OR

B) Nonexpendable principal

• REPORTING: (in the absence of donor or legal restrictions)

o GASB: Gains: should be reported as unrestricted assets and hence expendable Losses: Unaddressed by GASB

--Government may allocate losses between expendable & nonexpendable resources

o FASB: (Conflicting Standards)

Gains/Losses: report as increases or decreases in unrestricted net assets Losses: (2 steps)

1) Charge temporarily restricted net assets until it is depleted.

2) Charge any remainder losses to unrestricted net assets.

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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.

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• 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:o GAAP requires that most be “marked to market” (i.e. reported at fair

value) o GASB Statement No. 31

• Nonexpendable trust fund income: o Most states have adopted a version of either the Uniform

Management of Institutional Funds Act or the Uniform Prudent Investors Act.

o Permits a “prudent” portion of unrealized gains/losses to be used as distributable income.

Trust Funds - Overview

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• 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

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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 Fundo if the gift is nonexpendable

B) Special Revenue Fund o if the gift is expendable

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• 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

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Pension trust funds are a(n): • Independent Entity• Legal Entity• Financial Entity• Accounting entity

Liabilities of Pension Trust Fund:

• Responsibility of the EMPLOYER

The current* 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)

*GASB Statements No. 67, Financial Reporting for Pension Plans— an amendment of GASB Statement No. 25, which pertains to pension plan is effective for financial statements for fiscal years beginning after June 15, 2013.

GASB Statement No. 68, Accounting and Financial Reporting for Pensions—an amendment of GASB Statement No. 27 , which pertains to employers is effective for years beginning after June 15, 2014.

III) Pension Trust Funds

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• Statement of Fiduciary Net Assets* (Table 10-5)• Statement of Changes in Fiduciary Net Assets* • Schedule of Funding Progress (Table 10-6)• Schedule of Employer Contributions (Table 10-6)

*Table 10-5 presents a Statement of Net Assets

rather than a Statement of Net Position because

the City of Charlotte has not yet adopted

GASB Statement No. 63 for FY 2011.

Financial Reporting

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GASB standards require note disclosures relating to:

1) A detailed pension plan description and types of benefits provided.

2) employer’s funding policy (including employer and employee contribution rates for the current and past two years.

3) Key components of pension cost and the changes in Net Pension Obligation(NPO).

4) Key assumptions used in determining the pension cost.

5) Actuarial value of plan assets and liabilities for the current year and past two years.

6) Significant ratios.

Financial Reporting(cont’d)Note Disclosures

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Defined Contribution Plan• Employer makes series of pension contributions.• Employer defines inputs and contributions normally expressed as

a percentage of each employee’s salary.• Employer reports annual expense for the amount that it is

obligated to contribute to pension fund.• Employer has no pension related liab on its B/S• Employer has a lower risk• Defined Contribution plans are more

portable.• Employee bears all the investment risks• Pension fund, very often is managed by

a third party that is totally independent of

the employer.

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Defined Benefit Pension Plan• Employer specifies the benefits – the actual 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 their services and earn their pension benefits.

• Amount to be contributed to meet future pension obligations are calculated by actuaries. --Actuarial cost method: allocation of total cost of expected benefits

over the total years of employee service.

• Liabilities of the Defined Benefit Pension plan are in substance those of the employer.

• Both funding and accounting decisions relating to defined benefit pension plans are complex because of

--the uncertainties as to the amts to be paid to the retirees and --the amt earned on fund investments

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Financial Reporting: According to GASB, the main objective in pension plan accounting and reporting is to provide useful information for assessing the stewardship of plan resources and the ongoing ability of the plan to pay benefits.

• 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)

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• Annual Pension Cost is the government’s annual required contribution subject to certain technical adjustments that take into account interest on, and amortization of, any net pension obligation.

• Annual Required Contributions (ARC) Employer’s annual required contribution to a defined benefit pension plan, calculated in accordance with specified GASB parameters.

• Actuarial deficiencies (excesses) Difference between the annual required contributions and the actual contributions.

• NOTE: Per GASB Stmt. No 27, a government’s annual pension cost of maintaining or participating in a defined benefit pension plan should be based mainly on its annual required

contributions.

Key Terms

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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)

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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

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Minimum current criteria that an employer’s Annual Required Contribution (ARC) must satisfy include:

1) Contribution must consist of the employer’s normal cost which is the portion of the present value of pension plan benefits that is allocated to a particular year by an actuarial cost method (based on one of six specified actuarial cost methods).

2) a provision for amortizing the plan’s unfunded actuarial accrued liability.

3) Actuarial assumptions, including those pertaining to mortality, changes in compensation rates, and investment earnings.

4) Actuarial value of pension plan assets must be market related.5) Assumptions as to investment earnings rates and future inflation

should be based on long-term projections, rather than on those for a single year

Accounting-Annual Required Contribution

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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 Annual Required Contribution (cont’d)

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NPO allocated to governmental funds:• If NPO is positive:

--Then it should be reported as a liability in the government-wide statement of net position

• If NPO is negative:--Then it should first be used to reduce any previous

liability to the same plan, and second, any excess should then be reported as an asset in government-wide statement of net position.

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)

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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 is positive (a funding deficiency), the adjustment is a deduction from ARC

If NPO is negative (a funding excess), the adjustment is an addition to ARC

Regardless of whether NPO is positive or negative, it is referred to as an “Unfunded Actuarial Liability.”

Accounting (cont’d) – NPO

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Pension expenditure and pension expense are accounting

constructs and are determined in accord with the rules

established by the Board.•In governmental funds, pension expenditure is the cost

that will be liquidated with current financial resources.•In proprietary and government-wide statements, pension

expense is the cost subject to various GASB required

adjustments.•Employer’s pension expenditures/expense may include one

or both of the following:

1) ARC Contributions AND/OR

2) Payments of pension-related debt (not included in ARC

or NPO).

Accounting (cont’d) – Pension Expense/Expenditure

New GASB Statements No. 67 & No. 68GASB Statement No. 67, Financial Reporting for Pension Plans— an amendment of GASB Statement No. 25, pertains to pension plan and is effective for financial statements for fiscal years beginning after June 15, 2013.

GASB Statement No. 68, Accounting and Financial Reporting for Pensions—an amendment of GASB Statement No. 27 , pertains to employers and is effective for fiscal years beginning after June 15, 2014.

Key features: The new standards• Require an employer to report on its government-wide and proprietary

statements of net position its net unfunded pension obligation—the difference between the total actuarial liability and the fair value of the assets held in the pension plan.

• Limit the flexibility that governments have in determining their pension cost (which will be the amount reported as an expense in their government-wide and proprietary fund financial statements).

• Require the plan assets would be valued at fair value, not as currently permitted, a “market-related” value.

• Increase comparability among employers by requiring all governments to use the same actuarial cost method—the entry-age method.

• Further improve reporting by requiring assumptions that are deemed more realistic.

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• 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 position--Statement of changes in plan net position

• 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)

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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 reasonso Its use will improve financial management or accountingo Mandated by law, regulation, or GASB standards

Assets = liabilities• Since it is held on behalf of another party, all the assets it

has, are someone else’s.

IV) Agency Funds

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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

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• 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 is generally not needed for routine agency relationships such as payroll withholding

Agency Funds – Typical Uses

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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

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At the time of tax levy:

County Tax Agency Fund: Dr. Cr.

Taxes Receivable for OtherFunds and Units $500,000

Due to Other Funds and Units 500,000

Example 1 (cont’d)

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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)

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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) $ 198,000R-5 C.S.D. 150,000 30% $120,000 (1,200) 118,800Library 100,000 20% 80,000

80,000County GRF 3,200

*Amount due is $400,000 X Percentage of Levy

Example 1 (cont’d)

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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)

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Following entry in the agency fund shows the allocationof 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)

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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 $198,000Due to R-5 CSD 118,800Due to County Library 80,000Due to County GRF 3,200

Cash 400,000

Example 1 (cont’d)

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Upon receipt of the amounts due each government Delta City General Fund: Dr. Cr.

Cash $198,000Expenditures 2,000

Taxes Receivable-Current 200,000

Delta -5 CSD General Fund:

Cash $118,800Expenditures 1,200

Taxes Receivable-Current 120,000

County Library General Fund:

Cash $ 80,000 Taxes Receivable-Current 80,000

County GRFCash $ 3,200

Revenues 3,200

Example 1 (cont’d)

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• 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: o A government accounts for proceeds of pass-

through grants in an agency fund ONLY if it merely transmits funds without any administrative involvement.

o If government has administrative involvement, it accounts as revenues and expenditures/expenses.

Pass-Through Agency Funds

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• There are three types of trust fundsI) Private-Purpose Trust FundsII) Investment Trust FundsIII) 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