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How does establishing a Fund 73 affect State Aid?

Essentials of Fund 73 WASBO Accounting Seminar March, 2009 Presented by: Kathy Guralski, School Finance Auditor Wisconsin Department of Public Instruction. How does establishing a Fund 73 affect State Aid?. Equalization aid Pay as you go

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How does establishing a Fund 73 affect State Aid?

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  1. Essentials of Fund 73WASBO Accounting SeminarMarch, 2009Presented by: Kathy Guralski, School Finance Auditor Wisconsin Department of Public Instruction

  2. How does establishing aFund 73 affect State Aid? • Equalization aid • Pay as you go • Retiree payments are an expenditure for shared cost • Trust • Shared cost does not include the retiree payments RATHER • Shared cost includes the total amount of the contribution to the trust less the implicit rate subsidy on current benefits paid retirees

  3. How does establishing aFund 73 affect State Aid? • Equalization aid (cont.) • Trust Example: • Contribution of $500,000 • Expenditure for shared cost • Retiree benefits of $300,000 • No impact on shared cost – paid from trust • Implicit rate subsidy of $100,000 • Paid from trust to District because it has already been funded by the active employees • Reduces expenditure for shared cost • Amount that impacts shared cost is $400,000

  4. How does establishing aFund 73 affect State Aid? • State Categorical Aid • Pay as you go • No impact • Trust • Contribution amount less implicit rate subsidy may be allocated to individual functions as a fringe benefit IF: • Intent to fund the trust is shown • DPI measures that intent with 3 criteria

  5. State categorical aid eligibility requirements • One of three criteria must be met • Contribution must equal ARC amount • Contribution in current year must be 105% of the expenditures paid from the trust in the current year • Combined contributions for the current year plus the previous 2 years must equal 115% of the combined expenditures paid from the trust in the current year plus the previous 2 years.

  6. State categorical aid eligibility requirements • Example: • Current year contribution $500,000 • ARC $600,000 • Does not meet the 1st criteria

  7. State categorical aid eligibility requirements • Example: • Current year contribution $500,000 • Retiree benefits including implicit rate subsidy $300,000 • $300,000 X 105% = $315000 • Contribution does meet the 2nd criteria

  8. State categorical aid eligibility requirements • Example: • Current year contribution $500,000 • Previous two year contributions $300,000 total • Current year retiree benefits including implicit rate subsidy $300,000 • Previous two year retiree benefits including implicit rate subsidy $590,000 total • $300,000 X 105% = $315,000 • $290,000 X 105% = $304,500 • $300,000 X 105% = $315,000 • Total = $934,500 • Total Contributions = $800,000 • Contribution does not meet the 3rd criteria

  9. State categorical aid eligibility requirements • If none of the three are met, no allocation of the contribution is made and there is no impact on state categorical aid • In this example, criteria 2 has been met so the entire $500,000 of contribution is allocated (object 218) and reduced by the implicit rate subsidy of $100,000 (object 240)

  10. State categorical aid eligibility requirements

  11. CONTRIBUTION IN EXCESS OF ARC • How should a contribution that exceeds the ARC be accounted for? • Treat the amount up to the ARC the same as meeting the ARC • Excess must be accounted for as function 290000, object 218

  12. CONTRIBUTION IN EXCESS OF ARC • How should the implicit rate subsidy when the contribution exceeds the ARC be accounted for? • Example: • ARC - $500,000 • Contribution $600,000 • Implicit Rate Subsidy - $200,000. • 100% of implicit rate subsidy is allocated to individuals • Implicit rate subsidy has no connection to the amount of the contribution

  13. Should our District establish a FUND 73 Trust? • Can our District afford the minimum 5% required each year to receive additional categorical aid? • How is our district aided for general aid? • Negative territiary? • Run the numbers • How much categorical aid will I received? • Example: Contribution is $200,000 of which 15% is special education salaries and benefits • If this is aided at 28.5% • Additional categorical aid of approximately $8,550

  14. Should our District establish a FUND 73 Trust? • How will the District pay for these benefits in the future? • How will not funding impact bond rating? • What is the legal cost of establishing a trust? • What are the yearly administrative costs associated with a trust? • If you do not plan to fund the trust with more than the current year pay as you go, these are additional cost with possibly little to no benefit

  15. SEGREGATED FUNDS • Physical segregation of trust assets must be made. • Assets are titled in the trust name • Never pooled cash • Never part of investment pool in districts name • Must be available to pay benefits • Contributions are physical movement of funds from the District assets to the trust assets • Payments of benefits are physical payment from the trust assets

  16. ACCOUNTING FOR FUND 73 ACTIVITY • What do you need to have in front of you to properly account for district contribution and the trust activity? • Actuary study • Total insurance cost of current year retirees • Portion of insurance cost paid by retirees versus district • Group of employees to which benefit is offered • FTE or salaries by individual for the group of employees

  17. Determining how to Account for fund 73 activity • Follow the steps! • Collect general information • Exhibit A • Calculate implicit rate subsidy on retirees • Exhibit B • Determine whether the contribution is eligible for state categorical aid • Exhibit C • Allocation of contribution • Exhibit D

  18. Allocation of Contribution • Run through payroll • Example 1 – Exhibit D • The budgeted amount of $5724.12 would be divided by number of pay periods • Included as a fringe benefit • Credited to a liability account until time contribution is made to trust • Credited to a prepaid account if contribution made prior to the payroll

  19. Allocation of Contribution • Run through payroll • Example 1 – Exhibit D • Contribution made July 1 for $500,000 • Prepaid Expense • Cash • Expenditure recorded through payroll • Individual function object • Prepaid Expense

  20. Allocation of Contribution • Run through payroll • Example 1 – Exhibit D • Contribution made June 1 for $500,000 • Liability account • Cash • Expenditure recorded through payroll • Individual function object • Liability account

  21. Allocation of Contribution • Run through payroll • Year end should reflect actual contribution. If the contribution is different at year end than budgeted, a year end adjustment needs to be made. That can be done either with the last payroll or as a year end journal entry. • Journal entry • Can do the allocation as a journal entry versus run through the payroll

  22. Accounting for fund 73 • Follow the steps! • Account for contribution to trust • Exhibit E • Account for retiree contribution towards insurance • Exhibit F • Retiree benefits paid from trust • Exhibit G • Summary of transactions per account • Exhibit H

  23. Self-funded Insurance • Contribution • Based on premium equivalency plus implicit rate subsidy • Retiree Benefits • Generally the actual costs are paid from the trust (no need to account for implicit rate subsidy because the actual costs are being paid)

  24. Self-funded Insurance • What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? • Premium equivalency at beginning of year • $200 • Actual costs incurred during the year • $190 • Adjustment at year end to reflect actual cost • ($10)

  25. Self-funded Insurance • What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? • It may be hard to determine the actual costs by June 30th • Contribution to the trust is due June 30th • The 5% is a minimum requirement to show intent

  26. What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? • Example: • Year 1: Premium equivalency - $500, Actual cost - $490 • Year 2: Premium equivalency - $500, Actual cost - $550 • Year 3: Premium equivalency - $550, Actual cost – $525

  27. What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? • Example: • Year 1 • ARC $800,000 • Contribution $525,000 ($500,000 x 105%) • Actual retiree payments $490,000 • Meets the 2nd criteria of additional 5%

  28. What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? • Example: • Year 2 • ARC $800,000 • Contribution $525,000 ($500,000 x 105%) • Actual retiree payments $550,000 • Does not meet any of the 3 criteria

  29. What happens when you want to contribute exactly 5% additional to meet the categorical aid requirement? • Example: • Year 3 • ARC $800,000 • Contribution $577,500 ($550,000 x 105%) • Actual retiree payments $525,000 • Meets the 2nd criteria of 5% • Premium was increased

  30. ? • Could you increase the contribution every 3 years to have a cushion? • Example: • Year 1: Premium equivalency - $500, Actual cost - $490 • Year 2: Premium equivalency - $500, Actual cost - $550 • Year 3: Premium equivalency - $550, Actual cost – $525

  31. Could you increase the contribution every 3 years to have a cushion? • Example: • Year 1 • ARC $800,000 • Contribution $595,000 ($500,000 x 105% plus a cushion of $70,000) • Actual retiree payments $490,000 • @105% = $514,500 • Now it’s 21% additional but still below ARC • Meets the 2nd criteria of additional 5%

  32. Could you increase the contribution every 3 years to have a cushion? • Example: • Year 2 • ARC $800,000 • Contribution $595,000 ($500,000 x 105%) • Since there is not 3 years yet, will add another $70,000 cushion • Actual retiree payments $550,000 • @ 105% = 577,500 • Now it’s 8% additional but still below ARC • Meets the 2nd criteria of additional 5%

  33. Could you increase the contribution every 3 years to have a cushion? • Example: • Year 3 • ARC $800,000 • Contribution $577,500 ($550,000 x 105%) • Now there is 3 years and there is $98,000 cushion from the 2 prior years • Actual retiree payments $525,000 • Three year contributions $1,767,500 • Three year retiree payments @ 105% $1,617,000 • Now meets the 2nd and 3rd criteria

  34. Criteria does not change for self-funded it just becomes harder to determine CONTRIBUTION MUST BE MADE BY JUNE 30TH TO BE AN ELIGIBLE COST

  35. QUESTIONS? Kathy Guralski School Finance Auditor 608-266-3862 kathryn.guralski@dpi.wi.gov

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