ProgramSupportCenter
DEPARTMENT OF HEALTH & HUMAN SERVICES .Financlal
Mansg€mont Sen lcs
Dlvlglonof Cost Allocation
DCAWeeternField Offlce
50 Unltod NatlonsPlaza,Room347
San Francigco,CA 94102
Michael Havey,
J. BureauChief
Division Accounting Reporting
of and FtB1$ffiffi
California StateController'sOffice
P .O . B o x 9 4 2 8 5 0
Sacramento, CA 94250
DearMr. Havey:
Following a discussion policyinterpretation
is and to (including
relative refinancing
'
or of
refunding restructuring) pension bonds(POBs)
obligation under January
the 31,
1994,OMB policystatement.You maydistribute to the counties theiruse.
this for
lssue
Underwhatcondition the refinancing pension
is of bonds(POBs)
obligation an
cost?
allowable
) Background
OMBCircular that interest borrowed
A-87provides on however
capital, is
represented,
exceptwhenassociated building
unallowable with or
acquisition construction.
Governmental haveargued
entities of
thatthe issuance POBsat a lowerinterestrateto
replace unfunded
the accrued (UAALor UAL)whichwerebeing
liability
actuarial
amortized higher
at OMBhas allowed
rateswouldbe lesscostly.As a result,
interest
the
method financing UALthrough issuance POBsto
an alternative of the of
accornplish samepurpose a lowercost.
the at
OMBPoticy Letter
On January , 1994,OMBissued policystatement
31 a that interest POBs
stating on
issued finance UAL is a surrogate the actuarially
to the for determined interest the
on
pension and,therefore, allowable
liability is underA-87provided (condition of 3):
that 1
"Debtfinancing the unfunded
of liability
actuarial (UAL)is not morecostlyto the
Federal Government than regularpension financingoverthe remaining
unamortized of the UAL,considering
life bond principal, issuance
interest, costs,
and any otherrelevantfactors, determined the timeof the financing."
as at
o
Phone:(415) 437-1820 Fax (415) 437:1823. E-mail: dcasf@psc.gov
-2-
Thispolicywas narrowly for purpose indicated
constructed the specific as aboveand
of purpose indicated the closing
further illustration its restricted is in paragraph the
of
1994 policywhichstates:
'This interpretation addresses criteria
only the that shouldbe metfor an entityto
recover to
interest bondsissued fund unfunded
on pensionliability"
POBs
ln the climate lowerinterest
of rates, number governmental
a of issuedPOBs
entities
beginning in the mid 1990s. Interest to
rateshavecontinued comedownto levelsnot
seenin overfortyyears. Sorneentities haverefinanced are considering refinance
or to
thoseoriginal POBsto obtainsavings on yet lowerinterestrates. Questionshave been
underthe1994policystatement
askedif this is permissible
Policy Interpretation
Whilethe 1994policystatement not discuss
did refinancing the POBs,it is our
of
opinion that if the aggregate costof the refinancedPOBsis lesscostly thanthe POBs
)
that it replaces, refinanced
the POBswouldbe acceptable underthe 1994policy
statement. Conversely, cost the
if the aggregate of refinancing POBsis morecostly
thanthe POBsthat it replaces, excess
the costwouldnot be allowable. This
interpretation consistent the 1994
is with policythat madethe original
POBallowable if
it accomplishes samepurpose a lowercost.
the at
Sincerely,
DavidS. Low
Director
-ll
rf
a t
tt/
t
DEPART]IIENT OF I{EAL: d & HUMAN SERVICES O'ffics st ttre SecrenarY
: frt
I ar(
- - : t E
Wasfiington. D.C. 20201
-
F E B3 l W 4
I
EO: Directors, Divisions of Cost AJ.J.oca
FROlrt:
su8;r8cF: fnterjretation of olIB Cirstlar A-87 -- Xnterest ReLated
to Ftrrrding of Pension FLans
Attached. Ls a letter I recentl.y received frou olltB concerning an
i:rterpretation of tb,e pension provislon of CircrrLar A-87. Tbe
speeilic issue, addressed by the interpretation i-nvoives tb,e
a1losabiJ.ity of inLeregt on bond,E issued to fund. an rrnfi:nd,ed
Bension !.iabiLity rrnder paragraph 8.13.b. of the Cirsular. lfhe
letter concludes tb,a.t th,ese costs are aLJ.otrabJ.e as a srrrrogate
for i:rterest on th,e unfi:nded pension J.iability included in tb,e
arurual actuarial.llr-dete:rni:ned pension' contrj-bution if cs:tain
criteria are Det,.
trbis issue bas been raised. by several- cor:nties ' in California
'criteria and
may corle up in ot&.er pa:ts of tb.e cor:ntry. Ehe
described in tb.e. OlfB letter be used where tb,ese situations
sh,ou,].d..
corne to the attention of DCAg.
$Ie worked cLoseJ.y ritb olilB and tb,e DCA office in San Francisco in
deveJ-oping tbe intergrretation and believe it is sor:nd and
equita.ble. I rould UJce to express qf irppreciation to Dave Low
and his staff, especial.J.y Todd, Stevenot and Jean Ctrui, for their
exsellent work on ttris coupJ.ex issue. Todd is lrighLy
krrorledgieable in tJris area and can provide technj.cal assistance
to other DCA offices on ttre app3.ication of the j-nterpretation to
specific cases should. tb.e nebd arise
Attachnent
EXECUTIVE OFFTCEOF THE PREsIDENT
o F F I C T E . O F A N A G E M E N TA N D B U D G E T
M
WASHINGTON. O. C. 20503
OFFICE OF FEtrCF^L
Fl NAil ClAt r|i^NAC€rr. €NT
.ranuary 31, 1994
I'{r. - Gata'. l.t. Talesnik, Dlrector
Office of Grants ltanigernent
Deparhent of Eea].tb ind Eunan Services
300 Independence Avenue, sI{
IooP. s17-D, Hl{Ir Euilding
Washington, Dc AO2O1
Dear !r[r. Talesnift: '
This is in response to- your request for
the provisions an interpretation of
of or'IB circulir A-87 p".t"i":.;ii"-ti." arlowability
of pension costs. You lngicit. tfiit your office
several inquiries has received.
about wheiher interest on bond.ed, d,ebt, issued,. to
fund an r:nfunded pension
.iiJir-itv- i= an ar].osrable cost under
Faragraph 8.13.b. of OirIBCircula, A1SZ
"*-:*urfv
Paaarr*-lrr
during
:..-.: --
this - period. of Lorrer interest
aL:
tt'q locll governinenti rates, State
hav.e Jo"-gtC t-o- red,uce tb.e interedt costs on
unfunded pension liabilities ly =eriin!
a rate ronas trra{ lear interest at
lower than th.e e>pectLd rate of retgrn
assets' the e>cpected' rate-of, retrrrn on pension pri" on pension plan
interesi' rate assets is the
_irg:l_F -;;q',tj;"rent.
.:ictuari"=-ir- carculating a govern'enr,€
annual pension contr:ibuti.on
requireae'nt This contribution
.incrudes , anglg othel thj.ngs r an uroJorrt-- il. ?;J "
ffi*i!:u "1Jlir.3tdu"u ii'"riiitv ?= weu-as ini.i*=i Jr,'-
ti,"
state .o.q . rocar governments argxre that,
unfunded liabilities since interest on
hai been allowea iy.r'eaeiar i!*.r"i.s under the
{ot?gg}ng provisions of circuiar e:ezl r.nr,erest ori d,ebt issued to
fund the unfunded liability shoura le'allosable
mechanism reduces costs to- the Federar ir gi1i= financing
that the Department of llealth and, gunan Government. l;.-iliiIit"
agencies services'and othe.r Federal
irite-rarret circular A-8? io arrow interest
pensioh liabilities on unfund,ed,
and, that state u"a li?-i il;il;enrs are beins
reimbursed for the Fed,"t.t Governn.r,iir
various grant Frograns.- share of these costs und.er
rn consideration of the
issued to finance an unfundea -foregoing., r believe interest
penliotr-
on bonds
interest +.ririty is a surrograte for
on the unfunded' pension riauirity -.1iJ,-'
incruded in the annual
actuarially-determined pinsion
- i]i.u.- -
";;*ib"tL""
allovable th"r*fore, is
u n d g r. p a ra g ri p i : "r ci.r cuiar
follol'ring A- Bz, if the-
criteria- are met:
M r . G a r y M . l a l e sn i k
January 31, 1994
Page 2
1. Debt financing of the unfunded actuarial liability (UAL) is
not uore costly to the Federatr Government than regrular pension
f5-nancing over the remaining unamortized, life of the UAL,
considering bond principal, interest, issuance ' costs, and any
other relevant factorsr ES dets:uined at the tine of
financing. If this criterion is not uet, interest on debt
issued to finance the UAL vil]- be allowed onlv to the, extent
of the regrrlar pension financing.
2. Al-1 net bond proceeds .are nade part of pension fund assets.
3. The funding for bond. principal and interest is (a) included. in
ea,ch periadrs pension requirement (e.g., annual, biennial, or
other) , (b) genFuted in the same manner as the actuary/ s
arnortization of the UAL at the time of the conversion to dabt
financing, and (c) calcurated using the weighted average
interest rate on the bonds for the p.eriod in place of the
actuarially-assuned interest rate. The period,{s pension
requirement consists of fund,ing f or bonci principll and,
interest applicab3-d to the period and the pension contiiluti-on
requireuent computed by the actuary for nor-:nal costs and any
uAl not funded by the bonds. Alternatives to (b) and (c) may
be used if, they do not result in substantially different
Fension charges.
This intee-pretation only add,r.esses the, criteria that should, be
met for an entlty to recover interest on boniis issued.. to fund
unfunded pension liabilities, ft does not address nhen an enti.ty
must fund nor=ral costs. for such costs to be a11owab1e. oMB
currently is revising Circular A-87 to clarify the criteria for the
ailowability o f n o ma l co sts
I trope this. satisfactori3-y answers your j.nguiry and should you
have any further guestions, please do not hesilatJ to calr me.
Very truly yours,
7t /*a /
/fu.rr.^rrttn-a-Nf \a^-zz*.-<,-,"2/
Norwood.J. J".-':aYorr,JF.
Chief, Financial Standaids and
Reporting Branch
I