Preparing Today for Tomorrow’s Pension Liabilities: The Impact of an IRC Section 115 Trust
As Arizona municipalities face complex pension challenges, particularly in regard to the Public Safety Personnel Retirement System (PSPRS), it is critical to explore and utilize effective management strategies. One such strategy involves the utilization of Section 115 Trusts, a tool that was pioneered by Public Agency Retirement Services (PARS) and has becomeinstrumental in managing financial uncertainties.
PARS, a leader in providing innovative retirement solutions to public agencies, administers the PSPRS-sponsored IRC Section 115 Arizona Employers Pension Prefunding Program (AEPPP), established by Laws 2020, Chapter 79 (Senate Bill 1354). This program enables cities and towns to prepare for future PSPRS pension fluctuations by creating a tax-advantaged fund specifically for long-term costs.
This trust allows municipal governments to set aside funds for future pension liabilities, and its primary goal is to provide fiscal stability and predictability in the face of fluctuating pension costs.
Why is this Important?
PSPRS, like many public pension systems, faces a myriad of uncertainties. These include market volatility, changes in demographics, and legislative reforms, all of which can significantly impact future pension liabilities and rates. The AEPPP offers a proactive approach to these challenges. By prefunding pension liabilities, cities and towns can mitigate the impact of these uncertainties on their budgets and long-term financial planning.
The benefits of using a Section 115 Trust are manifold. Firstly, it allows for greater budgetary control and financial forecasting accuracy. By setting aside funds today, municipalities can smooth out pension costs over time, reducing the burden of sudden rate increases. Additionally, the trust’s tax-advantaged status ensures that the funds grow more efficiently, maximizing the resources available for future pension liabilities.
Furthermore, partnering with PARS for the management of a Section 115 Trust brings the advantage of their expertise and experience. PARS provides administrative support and partners with industry leaders for tailored investment strategies to ensure that the trust is managed effectively and meets the specific needs of each municipality. It is ready-to-go, IRS-approved and includes value added extras such as ongoing compliance monitoring consulting, reporting, and auditing support.
In summary, the AEPPP emerges as a vital tool for Arizona municipalities combating PSPRS pension challenges. It offers a proactive way to ensure fiscal stability and predictability, and is key for the long-term sustainability of the pension system.
For more information on the AEPPP or to learn how PARS can directly benefit your entity, please contact PARS Senior Consultant Stacey Thao at 213-503-0828 or sthao@pars.org.
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