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Other Post Employment Benefits (OPEB) Trusts

Background

The Other Post-Employment Benefit Investment Trust Act of 2006, Tenn. Code Ann. § 8-50-1201, et seq., authorizes and sets conditions for the chief governing body of a political subdivision (defined as any Tennessee local governmental entity, including, but not limited to, any municipality, metropolitan government, county, utility district, school district, public building authority, and development district created and existing pursuant to the laws of Tennessee, or any instrumentality of government created by any one (1) or more of the named local governmental entities or by an act of the general assembly) to establish an investment trust to prefund other post-employment benefits (“OPEB”) obligations.

OPEB are non-pension benefits paid on behalf of former employees or the former employees' beneficiaries after separation from service. The benefits may include, but are not limited to, medical, prescription drugs, dental, vision, hearing aids, Medicare part B or part D premiums, life insurance, long-term care, and long-term disability.

The promise to provide OPEB to employees can create a significant future liability for the providing political subdivision. Some political subdivisions account for OPEB on a “pay-as-you-go” basis meaning that the costs of such benefits are reported as they are paid out to eligible recipients. In the past, political subdivisions were not required to report liabilities for OPEB in accrual-based financial statements.

GASB Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, establishes standards for accounting and financial reporting for state and local governmental employers that offer OPEB and requires accrual-basis measurement and recognition of OPEB expenses and liabilities that will result in recognition of expenses over periods that approximate employees’ years of active service.

Political subdivisions offering OPEB on a “pay-as-you-go” basis create potential liabilities that could cause reporting of negative net positions in accrual-based financial statements, possibly negatively affecting bond credit ratings which may result in an increased cost of borrowing. Political subdivisions prefunding OPEB though an Investment Trust may reduce such potential OPEB liabilities. 

Requirements to Establish an OPEB Trust to Prefund Benefits

The chief governing body of a political subdivision may establish by resolution a trust for prefunding OPEB accrued by employees of the political subdivision, to be paid as they come due in accordance with the arrangements between the employers, the plan members, and their beneficiaries on the following conditions:

  1. The chief governing body must establish a written plan of the post-employment benefits provided.
  2. The investment committee of the political subdivision must adopt, in writing, an investment policy authorizing how assets in the trust may be invested and such policy may only permit trust assets to be invested in any investment that would constitute a legal investment for assets of a Tennessee domestic life insurance company or, alternatively, trust assets may be invested and managed in accordance with the investment policy the political subdivision utilizes to manage its pension assets as long as such policy conforms with the Tennessee Uniform Prudent Investor Act of 2002.
  3. The trust must conform to all applicable laws, rules, and regulations of the internal revenue service, if any, and it is the sole responsibility of the political subdivision to ensure that the trust conforms to such laws, rules, and regulations.
  4. The State Funding Board must approve the trust document.

In addition, the trust document must also meet the following conditions for approval by the State Funding Board:

  • The trust created must be irrevocable, and the assets thereof must be preserved, invested, and expended solely pursuant to and for the purposes permitted by statute and must not be loaned or otherwise transferred or used for any other purpose.
  • The assets of the trust must be expended solely to:
    • Make payments for OPEB benefits pursuant to and in accordance with terms of the political subdivision's respective post-employment benefit plan; and
    • Pay the cost of administering the trust.
  • All of the business of the trust must be transacted, all of its funds invested, and all of its cash and securities and other property held in trust for the purpose for which received.
  • Notwithstanding any law to the contrary, all assets, income, and distributions of the trust must be protected against the claims of creditors of the political subdivisions, plan administrators, and plan participants, and must not be subject to execution, attachment, garnishment, the operation of bankruptcy, the insolvency laws, or other process whatsoever, and any assignment thereof must not be enforceable in any court.

Submission of the Investment Trust Document to the State Funding Board

When preparing the trust and related documents prior to submission to the State Funding Board, the political subdivision should utilize legal counsel to prepare the trust and other related documents.

Once that process is complete, the political subdivision should submit the trust and related documents to:

Sandi Thompson, Director
State Government Finance
Tennessee Comptroller of the Treasury
Cordell Hull Building
425 Rep John Lewis Way North, 4th Floor
Nashville, TN 37243-3400
Office: (615) 747-5380
Fax: (615) 741-5986
sandi.thompson@cot.tn.gov

The State Funding Board meets periodically, but not at any regularly scheduled time. The Division of State Government Finance (SGF) will work with all political subdivisions to meet their timelines for establishing an OPEB trust to pre-fund benefits. However, SGF will need sufficient time to review the trust, resolve any specific issues with the political subdivision and discuss the request with senior staff to the State Funding Board. Politicial subdivisions should be aware that State Funding Board meetings are public meetings and, as such, notice of a meeting must be posted at least five (5) business days in advance of the scheduled meeting time.

For further guidance, please contact the Division of State Government Finance at 615-747-5380 or SGF@cot.tn.gov.

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