EisnerAmper’s Michael Imber to Be Featured at Brookings Institute

June 20, 2019

By Elana Margulies-Snyderman

EisnerAmper Managing Director Michael Imber will be a featured panelist at the Brookings Institute’s 8th Annual Municipal Finance Conference on July 15, 2019, in Washington, DC. The panel, entitled “Payment-in-kind for state & local pensions: Good idea or not? What is it appropriate? When not?” will explore the pros and cons of using government real assets as an alternative funding mechanism for underfunded municipal pensions.

With an estimated nationwide funding gap of more than $2 trillion, government leaders have typically considered four solutions to tackle the pension underfunding problem. Borrowing has been the easiest political path, but it has its limitations, especially when the underfunding is substantial—as in the cases of Illinois, New Jersey and Connecticut. Raising taxes, cutting expenses and curtailing benefits are politically unpopular and difficult to pursue as sustainable solutions.

An innovative fifth alternative, however, is starting to attract attention among several states that could lead to a meaningful impact on pension underfunding: in-kind asset contributions. Sponsoring governments can contribute real assets—like land, buildings, infrastructure and other assets—to a trust that is beneficially owned by the pension fund.

Imber, Co-Leader in Eisner Amper’s Public Sector Advisory practice, presently serves on the Connecticut Pension Sustainability Commission, which has been studying the potential for such an approach. The Commission’s report is expected to be released in the next few weeks.

Imber advocates a model he calls the Legacy Obligation Trust (“LOT”).

In the LOT model, a government unit transfers selected assets to a trust, which could be put to better use and unlock hidden equity value. The trust, in turn, issues Certificates of Trust, much like shares of stock, and divides them amongst the various pension funds the government unit sponsors. The government unit then gets an immediate credit against its unfunded liability based on the fair market valuation of the assets contributed to the trust. The trust assets are then professionally managed to maximize economic utility, further enhancing value and providing additional offset to the underfunding in the future. Ultimately, the assets will have to be liquidated but only after the pension has enjoyed the benefit of the valuation increase.

“Pensions may benefit tremendously by incorporating the LOT model as it can drive the funded ratio up and cash contributions down, as well as potentially enhance the underlying government’s credit rating,” Imber explained. “This could have an immediate and positive cash flow impact on its budget.”

The city of Detroit resolved its Chapter 9 bankruptcy in 2013/14 when it transferred certain valuable real estate along the downtown waterfront and in the downtown area to satisfy European banks that had financed a $1.4 billion contribution to the City’s pension fund.

In 2017, New Jersey transferred its state lottery into the pension and received credit for the transaction. New Jersey is now exploring the potential to contribute additional hard assets into the pension as an alternative funding mechanism.

The Brookings Institute hosts what many consider to be the preeminent annual municipal finance conference that brings together market participants and the academic community to explore innovative approaches to solving municipal finance problems. Learn more about the Brookings Institute conference.

About Michael Imber

Michael Imber is a Managing Director in the Financial Advisory Services Group and leads the efforts in the Public Sector for Advisory Services.

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