One of the essential documents we require for our role as third-party administrator is a plan document. Each LOSAP should have a detailed plan document that outlines the benefits a participating volunteer firefighter can earn for their service. It is a vitally important document. Without it, confusion and misinformation can quickly set in regarding benefits that are owed. Our guess is that the need for a plan document is not news to most readers of our blog!
An equally important document is a written LOSAP investment policy. Sponsors are managing significant LOSAP assets, ranging from hundreds of thousands to millions of dollars, for the purpose of funding the benefits provided by the plan. As this blog post will examine, having an investment policy that covers how the trustees of those assets will manage the investment of the assets is critical. When we are hired by a sponsor to be the actuary for a LOSAP, the investment policy becomes an equally as important document as the plan document, as we use it to help us set a reasonable assumed rate of return on the plan assets.
A recent State Comptroller audit of the Lansing Fire District highlighted the importance of an investment policy for the District’s general funds. You can read that audit here: https://www.osc.state.ny.us/local-government/audits/fire-district/2023/09/01/lansing-fire-district-investment-program-2023m-62
A reader of this audit must be careful not to completely apply everything in this audit to LOSAP assets. In New York State, the possible investment vehicles for LOSAP assets are different than general funds. For LOSAP funds, General Municipal Law Section 217(k) states:
(k) Every fiduciary of a service award program will be required to act solely in the interest of the program’s participants and beneficiaries. Subject only to the provisions of the program document, a fiduciary may accept, hold, invest in and retain any investment if purchased or retained in the exercise of the degree of judgment and care, under the circumstances then prevailing, which persons of prudence and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to permanent disposition of their funds, considering the probable income to be derived therefrom as well as the probable safety of their capital.
This is commonly referred to as the prudent investor rule. The statute uses the terminology “program document”, but more typically the provisions of how investments are managed would not be found in the plan document, but in an investment policy. The investment of general funds is much more restrictive, and must be collateralized. When investing LOSAP assets, a sponsor is allowed to take a prudent amount of risk
The Lansing audit report includes the following paragraph on page 2 of the report:
A comprehensive investment program should serve four basic objectives – legality, safety liquidity and yield. To keep public funds safe, officials need to understand the requirements they must comply with and the investment limitations and safeguards required of fire district investments and deposits. Prudent cash management and investment practices must include, among other things, the adoption of a formal investment policy in accordance with New York State General Municipal Law (GML) Section 39 which details the fire district’s operative policy and instructions to officers and staff regarding the investing, monitoring and reporting of the fire district’s funds. The purposes of the investment policy include: establishing basic procedures to meet investment objectives; ensuring that investment assets are adequately safeguarded and collateralized, if necessary; establishing and maintaining internal controls and proper accounting records; and providing accurate reporting and evaluation of investment results.
This paragraph refers to GML Section 39, which requires municipalities to formally adopt an investment policy. The original scope of this Section was municipal general funds. But now that LOSAP assets have recently been re-classified by GASB 84 to be part of governmental funds (which was implemented by the OSC as part of the Annual Update Document (AUD) beginning with sponsor fiscal years ending on/after December 31, 2020) it would appear that the requirement to adopt an investment policy would also apply to LOSAP funds. At very least, it seems like best practice.
This paragraph also mentions prudent cash management. A LOSAP sponsor must keep in mind that the purpose of accumulating assets is to eventually pay benefits. If LOSAP assets are in investments with lengthy surrender charges or are not otherwise fully liquid, the sponsor may incur penalties to access the funds necessary to pay benefits.
Finally, this paragraph outlines a few purposes of an investment policy:
> establishing basic procedures to meet investment objectives. While this could cover several topics, this certainly has significant relevance to the work we do as actuaries for defined benefit plans and setting an assumed rate of return.
> ensuring that investment assets are adequately safeguarded and collateralized, if necessary. It is not necessary to have LOSAP assets collateralized; however, proper safeguards are essential for a proper investment policy.
> establishing and maintaining internal controls and proper accounting records. We believe the treasurer should be reviewing the LOSAP investment statements at a minimum quarterly, but ideally monthly, and reporting performance to the governing board.
> providing accurate reporting and evaluation of investment results. This often time comes in the form of setting benchmarks for comparison purposes. It also includes meeting with your investment manager at least once a year to review results and strategies for the future.
This audit was clearly focused on general funds, but we believe that with the change in the accounting and reporting of LOSAP assets due to the implementation of GASB 84, eventually the OSC will also look at the investment policy and management of LOSAP funds.
If your LOSAP does not have an investment policy contact your investment manager and ask them to help develop one. Then plan to review it annually.