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Investment in Future Fiscal Responsibility

Robust revenues and financial policies have successfully insulated California’s schools and public agencies from ongoing structural losses since the state’s prior fiscal decline of the Great Recession. This is seen in the state’s resiliency throughout the continued COVID-19 pandemic. As we have discussed previously, California’s outlook of current and forthcoming declines in public school enrollment, is not as bright. Persistent population trends point to not only far fewer children in California schools in the next thirty years, but a net exodus of population as well. The result in the not-too-distant future will be a smaller tax base and far less funding for schools.

Fiscal responsibility will be the watchword while opportunities are still available for schools and public entities to implement policies, programs, and restructuring to prepare for the much tighter forthcoming budgets. Now is the time to learn about different solutions and work with trusted advisors to craft custom programs that will best prepare entities for the budgetary belt-tightening looming ahead.

Staffing and benefit expenses are among the largest expenditure for public entities and, even more so, for educational agencies. Some of the greatest potential for long-term cost control measures can be accomplished through strategic benefit funding policies. Districts and municipalities are accumulating enormous post-employment liabilities both for pension and retiree health benefits. Prefunding OPEB liabilities as expeditiously as possible has become a fiscal necessity with the recent implementation of the GASB 74/75 accounting standards. Setting these funds aside in benefit trusts is key to an effective and responsible investment approach to alleviate the financial distresses for communities and their schools.

Similar funding requirements and investment pressures on PERS and STRS systems are very prevalent as the volatility in pension rates continue to spike pension liabilities for local agencies. Unpredictable and rapid increases to pension obligations are making it more difficult for school districts and public agencies to effectively budget for pension costs. A pension stabilization trust using an IRS-compliant Section 115 vehicle, available exclusively to public entities, can help mitigate the volatile expenses over time while preserving local control and flexibility.

Restructuring organizations’ budgets for the future will mean more than projecting the required staffing needed to meet service levels. Maintaining a vital and productive workforce for the long term includes attractive retirement incentives that give employees more flexibility into retirement while providing school districts better control over budgets. Coupling attractive early retirement benefits with a peer-based counseling approach creates a win-win arrangement for incoming retirees and the district.

Alongside solutions for local entities to plan for future contingencies, employees in both the public and private sectors will also need tools for retirement planning to best assist with their own fiscal responsibility. Employer sponsored benefit programs that are more affordable today and provide the needs of tomorrow are a prudent way to enhance financial security for employees and their families. Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs), and Flexible Spending Accounts (FSAs) for health care and childcare expenses allow employees to pay for a range of current and future expenses while removing tax liabilities on contributions made toward these health benefit programs for employees and payroll tax savings for employers.

The changes to California’s fiscal health have been long predicted and, as conditions have developed, show no indication of trends that will lead to higher student enrollment, increased funding, or a growing tax base. During this window of opportunity, the state, local agencies, and their taxpayers have the unique facility to invest now and avoid imminent budget challenges ahead.

About Melissa King
Melissa King joined AP Keenan in 2022 with more than five years of experience in public sector retirement planning. As Account Executive for Municipal Employee Benefits Practice, Melissa lends her prior industry experience from U.S. BENCOR/MidAmerica and PwC to provide clients a holistic review and customized consultations of employee benefit and retirement planning strategies while focusing on turnkey cost-saving solutions.