In-Kind Asset Transfer to Defined Benefit Pension Plans

GFOA Advisories identify specific policies and procedures necessary to minimize a government’s exposure to potential loss in connection with its financial management activities. It is not to be interpreted as GFOA sanctioning the underlying activity that gives rise to the exposure.

GFOA Advisories identify specific policies and procedures necessary to minimize a government's exposure to potential loss in connection with its financial management activities. It is not to be interpreted as GFOA sanctioning the underlying activity that gives rise to the exposure.

Funding aging infrastructure often requires a sizable investment, and funding sources have evolved from being solely a public sector function to a public-private partnership for certain infrastructure projects. Defined benefit pension and other post-employment benefit (OPEB) plans look for investment opportunities that provide comparable or improved investment returns compared to traditional investment in capital markets (i.e., stocks and bonds), and look for ways to diversify their investment portfolios from the risks involved with traditional investment activities. Some governments have explored the possibility of making in-kind transfers of government-owned infrastructure assets to these defined benefit plans to satisfy contribution funding requirements and/or to improve the funded status of these plans.

Government-owned infrastructure is comprised of a variety of physical assets, intangible assets and/or other operations where the primary purpose is to provide services to the general public. Some infrastructure is revenue and/or profit generating, and typically accounted for as an enterprise fund under U.S. governmental accounting standards. This can include services that involve a high degree of physical assets (i.e., airports, water distribution, utilities, toll roads and bridges, and waste management activities), as well as non-physical assets such as lotteries. Other government-owned infrastructure does not generate revenue or profit, but may have considerable value when sold, such as buildings or land. These are typically accounted for in a governmental type fund when used to support ongoing government operations. Government-owned infrastructure typically has ongoing liabilities in the area of maintenance, future contingencies, and/or regulatory requirements.

GFOA does not recommend transferring ownership of government-owned infrastructure to a defined benefit plan for the following reasons:

From the perspective of a general government

  • Oftentimes, a government transferring an infrastructure asset to its pension plan does not result in a tangible benefit. Once the asset is transferred, the government will have to purchase or construct another asset, pay rent or lease requirements, or, if revenue producing, take action to replace revenue that has been assigned to its retirement plan.
  • Transferring an asset to the plan could result in an opportunity cost to the general government, including loss of an asset that gains in value or revenues in the event of an economic upturn or improved operating structure.
  • Transferring an asset to a plan could result in loss of intangible community benefits, which were once provided by the government. Upon transfer, the plan would likely view the asset as a financial instrument.

From the perspective of a pension plan

  • Retirement plans prefer liquidity to pay pension benefits. Any asset may carry some degree of liquidity risk. An asset of interest to the plan should be liquid or generate revenue for the plan comparable to other assets being considered. A physical asset such as a building or property can be difficult to convert to cash which could hinder the plan’s primary mission of paying benefits.
  • Accepting a property that requires active management to garner its true value and/or generate revenues presumes the plan is equipped to manage or to employ management of the assets without incurring excessive costs or complexity beyond its primary role of paying benefits. Additional management and operating costs may not be reflected in the transfer analysis. Accepting a property may also affect a pension plan’s overall investment policy and asset allocation.

From the perspectives of both a general government and a pension plan

  • The value of a public asset can be difficult to determine given the absence of comparable valuations or appraisals, particularly if the use and/or management of the asset is being changed. Additionally, for revenue producing assets, any supplemental actuarial valuation performed on the projected revenue streams is difficult to assess because of potential changes to the asset’s operations after the transfer, affecting its future revenue potential.
  • An in-kind asset transfer requires legal reviews and due diligence that are complex and add additional cost. Examples of such include, but are not limited to: review of whether there are any liens, bond covenants, restrictions on disposition or use requirements, other claims on the property, and insurance requirements.  A review for compliance to any statutory laws that may prohibit asset transfers or sales must be undertaken, as well as assessments of potential liability or maintenance issues related to the asset.
  • Asset transfers should be irrevocable.  As such, there is no recourse for the transferring government should the asset appreciate and no recourse for the pension plan should the asset depreciate considerably in the future.
  • Board approval date: Friday, March 5, 2021