Section 115 Trusts
WHY USE A SECTION 115 TRUST?
Investment restrictions that apply to the general fund of a Public Agency (CA Government Code 53601) do not apply to the assets held in an Irrevocable Section 115 Trust, thus allowing for more flexibility in the investment strategy. Setting aside funds in a Section 115 Trust can potentially earn a higher rate of return than funds invested within 53601 guidelines.
Establishing a Section 115 Trust to prefund OPEB obligations is a best practice recommended by the Government Finance Officers Association (GFOA). Some of the benefits that a Section 115 Trust program can provide for agencies include utilizing these trusts as a budget stabilization tool, improving the Agencies’ overall credit rating, an opportunity to earn higher investment returns, and decrease risks though diversification of plan assets using different asset management approaches. Additionally, given Governmental Accounting Standards Board (GASB) Statement, GASB No. 75, which requires that public agencies recognize OPEB liabilities on their balance sheet, establishing a trust will allow the Public Agency to recognize the assets set aside to reduce its UAL.