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Underfunded Communities

Posted by: cindypolc Posted date: April 13, 2018


PROTECTING LOCAL GOVERNMENT RETIREMENT AND BENEFITS ACT

Underfunded Communities

          On December 20, 2017, Public Act 202 of 2017, the Protecting Local Government Retirement and Benefits Act, MCL 38.2801 et seq., became law in Michigan. The Act created new duties for municipalities offering pension and/or retirement health benefits. It also created the Municipal Stability Board within the Michigan Department of Treasury.
Municipalities providing retirement health benefits must now pay certain minimum benefit costs, submit a summary retiree health care report on an annual basis, and conduct an actuarial experience study at least every five years. The summary retiree health care report is required to contain information pertaining to the municipality’s retirement system. The objective of this new legislation is to track the funded status of each municipality as to pension and retiree health benefits and to determine and address “underfunded status”. Public Act 202 of 2017 defines “underfunded status” as follows:

1. For retirement pension systems, the triggers for primary units (cities, villages, counties and townships) are if the unit is less than 60% funded and has an annual required contribution that is over 10% of governmental fund revenues. The non-primary unit trigger is if the unit is less than 60% funded.
2. For retirement health care systems, the triggers for primary units (cities, villages, counties and townships) are if the unit is less than 40% funded and has an annual required contribution greater than 12% of governmental fund revenues. The non-primary trigger is if the unit is less than 40% funded.
On March 12, 2018, the Department of Treasury published a list of communities with underfunded retirement benefits that shows there are currently 121 local units of government with “underfunded” pensions as defined in the Act, 45 communities with “underfunded” retirement health benefits, and 27 communities having both “underfunded” pensions and retirement health benefits.

A local unit of government whose underfunded status has not been waived (a waiver may be granted if the state treasurer determines that the underfunded status is adequately being addressed by the local unit of government) is required to submit a corrective action plan for review and approval by the Municipal Stability Board. The corrective action plan is intended to establish options to remove the local unit of government from underfunded status. Section 10 of the Act states that corrective options may include, but are not limited to, the following:

(a) For retirement pension benefits, any of the following:
(i) Closing the current defined benefit plan.
(ii) Implementing a multiplier limit.
(iii) Reducing or eliminating new accrued benefits.
(iv) Implementing final average compensation standards.
(b) For retirement health benefits, any of the following:
(i) Requiring cost sharing of premiums and sufficient copays.
(ii) Capping employer costs.

The Michigan Court of Claims has exclusive jurisdiction over any action challenging the validity of the Act or an action or inaction under the Act. The Michigan Department of Treasury is a necessary party to any action filed under the Act (Section 12).
Public Act 202 essentially provides for a greater level of transparency with respect to the funding status of pension and retiree health benefits but otherwise did not, thanks in large part to the efforts of police and fire public sector unions, establish broad, overarching authority to limit, reduce or eliminate pension or retiree health benefits for police and fire employees as was the initial goal of certain republican legislators. You can view the published report here.

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