CalPERS presenter says Section 115 trusts can lower reported OPEB liabilities and boost investment earnings

A representative of the California Public Employees Retirement System’s (CalPERS) Supplemental Employer Retiree Program (SERP) said Section 115 trusts offer public agencies a voluntary way to prefund other post-employment benefits (OPEB), reduce reported liabilities under GASB 75, and earn tax-free investment returns.

"Section 115 trusts allow public agencies additional options to grow assets and aid in making defined benefits more affordable," the presenter said, noting that IRC section 115 governs the trusts and that earnings within qualifying trusts are tax free.

The presenter explained that OPEB covers benefits other than pensions — most commonly retiree health insurance — and described two liability types actuaries commonly identify: explicit subsidies (a set employer contribution to retiree premiums) and implicit subsidies (when retiree health costs exceed premiums charged to retirees). The presentation framed agency options as either pay-as-you-go (PAYGO) or prefunding via a Section 115 trust.

The presenter gave three primary financial advantages of prefunding: (1) a higher discount rate on actuarial valuations, which can lower total OPEB liability; (2) tax-free investment earnings to help pay OPEB costs; and (3) the ability under GASB 75 to apply trust assets dollar-for-dollar to offset total OPEB liability, reducing net OPEB liability reported on financial statements.

As examples, the presenter described a school district whose actuarial discount rate moved from 3.13% (in a PAYGO-aligned valuation) to 5% after establishing a prefunding policy and placing assets in a Section 115 trust. The presenter said an initial contribution of $153,000 produced about $14,000 in tax-exempt investment income in under a year, producing roughly $168,000 in trust assets that could be used to reduce the net liability in the valuation.

A county example was also cited: the presenter said the county carried about $28,300,000 in total OPEB liability in 2007 under PAYGO, switched to a Section 115 funding policy in 2009, and over 14 years realized roughly $20,000,000 in investment income while reducing total OPEB liability by about $5,000,000; the presenter said the county reached a funded ratio of about 77% (the presenter attributed these outcomes to the combination of an ongoing funding commitment and trust investment earnings).

Program details noted in the presentation include that CalPERS has administered a Section 115 trust program since 2007 (referred to in the presentation as the California Employers Retiree Benefit Trust), that the SERP program manages over $22,000,000,000 in assets and serves more than 600 contributing agencies, and that the program offers three asset-allocation strategies based on a 20-year horizon. The presenter emphasized that participation is voluntary, strategy changes are allowed, and fees are charged only to assets in the trust with no tiered pricing, termination fees, or fees for changing strategies.

The presenter also announced a fee reduction: the program’s participation fee rate was described as 10 basis points for nearly a decade and was reduced to 8.5 basis points effective Oct. 1, 2024.

The presentation concluded with procedural next steps recommended to agencies: schedule a consultation to review the agency’s OPEB situation, review funding options with an actuary, complete contracting forms, and select an investment strategy. The presenter provided the SERP contact (SERP4U@calpers.ca.gov) for follow-up.

The presentation repeatedly referenced IRC section 115 (Internal Revenue Code) as the statutory basis for the trust structure and GASB 75 as the relevant accounting standard that permits trust assets to offset OPEB liabilities under the described conditions. The presentation offered examples, illustrative numbers, and program-level facts but did not constitute a formal action or policy change by any agency.