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Securities Law

GFOA Board Approves Pension, Bond Fee, Other Best Practices

The Government Finance Officers Association’s executive board has approved five new best-practice documents, including one recommending that issuers develop a policy to ensure they adequately fund pension plans.

Other best practices help issuers understand bond fees, develop “structurally balanced” budgets, manage grants and evaluate the costs and benefits of internal pricing systems.

The pension funding practices, “Guidelines for Funding Defined Benefit Pensions,” evolved out of pension funding guidelines GFOA developed last year in concert with 10 other groups representing state and local governments, retirement systems and government employees.

The groups created the guidelines after the Governmental Accounting Standards Board stopped requiring employers to calculate and disclose actuarially required contributions (ARC) in reports, and eliminated standards for calculating ARCs.

The GFOA pension funding best practices, approved earlier this month, recommends that each state and local government with a defined-benefit plan formally adopt a funding policy to ensure benefit costs are adequately funded.

Funding policies should incorporate a series of “principals and objections,” according to the document.

For instance, governments should have contributions determined by actuaries at least every two years, and contributions should be based on those determinations.

Contributions should be calculated so as to fully fund the long-term costs of promised benefits, be relatively stable and allocate costs over employees’ period of active service, the document said.

In addition, governments should commit to fund the full amount of the determined contributions each period and should communicate progress in meeting pension funding objectives, it said.

GFOA plans create three additional best practices related to pension funding, according to the paper. These will give guidance about how principals and objectives should apply to actuarial cost methods, asset smoothing and amortization.

It is unclear when the three papers will be issued and GFOA staff did not immediately respond to a request for comment.

The GFOA executive board also approved “Costs of Issuance Incurred in a Publicly Offered Debt Transaction,” a best-practice document designed to help finance officers ensure bond transaction costs and fees are reasonable and for legitimate services.

The paper focused on “direct” issuance costs like fees paid to attorneys, underwriters, financial advisors, escrow verification agents, auditors, rating agencies and pricing verification agents, as well as fees for printing and distributing officials statements and other documents.

The new “Structurally Balanced Budget Policy” best-practice paper recommends governments adopt formal policies that require them to create structurally-balanced budgets, in which recurring revenues equal recurring expenses.

The paper noted that statutes require many municipalities to create balanced budgets, but that statutorily-required budgets may not be financially-sustainable for some municipalities. For instance, such budgets could include nonrecurring revenue, such as asset sales or reserves, to fund ongoing expenditures.

“A true structurally balanced budget is one that supports financial sustainability for multiple years into the future. A government needs to make sure that it is aware of the distinction between satisfying the statutory definition and achieving a true structurally balanced budget,” the best practice paper said.

The “Establishing an Effective Grants Policy” recommends that state and local governments establish procedures related to all steps in the grant process.

Governments should assess grants to ensure they align with the municipality’s mission and priorities, and should conduct a multiyear analysis of a grant’s costs and benefits and have guidelines to determine if a grant should be renewed, the paper said. Grant policies should also include operational and administrative provisions that define how grants will be managed and how employees will be trained. Policies should review employment conditions for grant-funded staffers.

GFOA’s “Pricing Internal Services” best practice paper helps governments evaluate the costs and benefits of internal pricing systems, which are used to assess the costs of products and services used by different departments within a government.

Such products and services could include insurance, payroll processing, office space and information technology, the best practices paper said.

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