Accounting & Fiscal Guidance
Question and Answer Guidance Regarding Debt Financing for a Districts Early Retirement Incentive Obligation for TPAF and/or PERS as of December 2002
Q.1 Can a school district issue refunding bonds to replace their existing early retirement incentive plan (ERIP) liability as a result of participating in either of the states 1991 and/or 1993 ERI programs?
A. Yes. Chapter 42, Public Laws 2002, effective July 12, 2002, revised N.J.S.A.18A:24-61.2 to permit school districts to issue refunding bonds to fund their remaining early retirement incentive program liability.
Q.2 What are the highlights of the new law?
A. C.18A:24-61.2 states:
Q.3 Why should a district consider issuing bonds to refund their existing ERIP liability?
A. The interest rate applied to the initial pension liability is 8 3/4%. The interest rate charged on newly issued bonds may be appreciably less and could result in substantial long-term savings.
Q.4 What are the basic steps to refunding?
A. Generally, districts will perform the following steps to refinance their ERIP obligation but should contact their bond counsel for specific details:
Q.5 Will the DOE calculate debt service aid on the ERIP refunding bonds issued by the district to refinance the ERIP liability?
A. No. The debt is not related to capital projects and, therefore, the district is not eligible to receive debt service aid on these refunding bonds.
Q.6 Where does a district currently budget the ERIP payments?
A. Based on the January 5, 1994 hotline, districts currently budget the expenditure in account 11-000-290-232 for TPAF and account 11-000-290-242 for PERS.
Q.7 If a district is able to take advantage of the new law and issue refunding bonds prior to the April 1, 200X due date of the original budgeted ERIP annual payment, will there be any requirements or limitations on a districts use in the current year of the unused appropriation for the original budgeted amount?
A. No, but the DOE strongly encourages districts to use their unremitted April 200X budgeted liability to fund their subsequent years budget. The DOE will require the district to anticipate the general fund surplus balance in their subsequent years budgeted recapitulation of balances on line 1640.
Q.8 What are the budget requirements for annual payments of the new debt?
A. The district will annually budget the principal and interest in the debt service fund. Revenue will be raised as tax levy and the appropriation will be annually budgeted in two newly established accounts for 03-04 entitled, "Redemption of Principal-Early Retirement Bonds" (#40-701-510-910) and "Interest on Early Retirement Bonds" (#40-701-510-835).
Q.9 What fund should be used to record and report the ERIP refunding bond proceeds?
A. The accounting treatment will depend on whether there is a requirement in the bond agreement to use the debt service fund for accounting and reporting. If there is no legal requirement to use the debt service fund, the transaction is recorded in the general fund and the general long-term debt account group (GLTDAG). GASB 34 implementers will no longer use the GLTDAG for reporting purposes, but may continue to use the account group for internal accounting purposes. There will be a conversion entry at year end to report the balance of the bonds payable (and related unamortized premium or discount and issuance costs) on the Statement of Net Assets in the governmental activities column.
Q.10 Where in my districts ledger do I record the refunding transaction? Where does the transaction appear in my year-end CAFR?
A. See Q.9 to determine whether to use fund 10 or fund 40. Bond principal (face or par value) should be recorded using the established revenue account 10-5110-000 or 40-5110-000, "Other Financing Sources- Bond Principal". Refer to Q.12 and Q.13 for accounting guidance on debt issuance costs and premium or discount. New account number 11-000-515-915 or 40-000-515-915, "Retirement of ERIP Liability" should be established for the purpose of recording the retirement of the existing ERIP liability.
The transaction is reported in the year-end CAFR as "Other Financing Sources Long-Term Debt Issued" and "Other Financing Uses Repayment of ERIP Liability.
Note that at the time the payment is made to retire the unfunded liability, the balance is removed from the GLTDAG by reversing the liability in account number 90-541, "Unfunded Pension Liability" against account number 90-305, "Amount to be Provided for Retirement of General Long-Term Debt".
Q.11 Does it make a difference if the ERIP liability is paid directly to the state at closing?
A. In most circumstances, the bond proceeds will be paid directly to the State Division of Pensions at closing. The transaction should be reflected in the districts accounting records and financial statements whether or not proceeds are deposited in a districts bank account.
Q.12 An amount equal to the issuance costs was deposited in the districts bank account and then disbursed by the district. How does the district account for this transaction?
A. Debt issue costs paid out of bond proceeds should be reported in the fund financial statements as an expenditure as opposed to an "Other Financing Use". As in the preceding question, the full amount of the transaction should be reflected in the districts records whether or not proceeds are deposited in a districts bank account. If proceeds have been deposited in a districts bank account, the appropriate cash transaction would be part of the entries. As noted in Q. 9, for the GASB 34 district-wide statements, there will be a conversion entry at year end to report the unamortized issuance costs on the Statement of Net Assets.
Q.13 What about premium or discount?
A. The accounting treatment for premium or discount will be similar to the accounting described in the GAAP Technical Manual, chapter 11, except that the premium or discount will be recorded in the fund which has the bond proceeds. If a district has implemented GASB 34, in the year of bond issuance and prospectively, there will be a conversion entry at year end to report the unamortized premium or discount in the district-wide Statement of Net Assets and the related expense in the Statement of Activities. Districts are not required to calculate the beginning balances of unamortized premium, discounts or debt issuance costs related to bonds issued prior to the year of implementation of GASB 34.
YEAR END REPORTING
Q.14 For year-end financial reporting, would there be specific footnote disclosure requirements that relate to the refunding of the ERIP liability?
A. Yes. Districts must include a general description of the transaction in the notes to the financial statements in the year the refunding takes place. Be sure to include:
Note: Districts should refer to GASB Codification sections 1500 and D20 for further guidance on year-end reporting and disclosures.
Q.15 Are there any specific GASB 34 year-end reporting issues relating to the refunding transaction?
A. Yes. The two Implementation Guides published by GASB provide guidance on GASB 34 financial reporting for bonds issued, including provisions for:
1) Year-end accrual of interest.
2) Amortization of premium or discount over the life of the bonds.
3) Inclusion for discussion within the Management Discussion & Analysis.
Q.16 Will the tuition calculation be amended to reflect the accounting change of the annual ERIP payment from current expense to debt service for the refunding bonds?
A. Yes. The tuition calculation will continue to include the annual payment. To accommodate this, two new budget lines (09795 and 09796) have been added to fund 40 in the 03-04 district budget to be used for budgeting and reporting the annual principal and interest payments. (See Q.8 for account numbers and titles). These lines will also be included in the estimated tuition calculation starting in 03-04 and will be used in the certification of rates for 03-04 and beyond.
Q.17 How can principal on the refunding bonds for ERIP be allocated to the tuition calculation when the business services code and the A4-1 and A4-2 guidelines for certification of rates only allows interest on bond proceeds to be allocated?
A. The administrative code at N.J.A.C. 6A:23-3.1(e)3 and the A4-1 and A4-2 instructions specifically allow employee benefits as an allowable expenditure to be allocated in the certification of tuition rates. Moreover, the administrative code specifically excludes certain other items, and the ERIP liability payment is not specifically listed or considered an exclusion. Therefore, for purposes of tuition, the ERIP liability and its associated annual payment once repaid using refunding bonds, continues to be considered a benefit related cost and an allowable charge to be allocated in the certification of tuition rates.
The administrative code citation regarding restrictions on allocating principal on bond proceeds is related to bonding for capital purposes under the building use charge. It has no relation to refunding bonds for ERIP liability and therefore is not applicable.
The A4-1 and A4-2 guidelines and the estimated tuition rate forms included in the budget software will be changed to reflect this new distinction for ERIP refunding bonds annual principal/interest payments. No amendment is needed requiring state board approval in the administrative code for business services.