Local government pension and other post-employment benefit stress points
Benchmarks for local government pension and OPEB funds as mandated.
This article is the second in a series that provides details regarding Michigan P.A. 202 (the ACT) that was passed in December of 2017 by the Michigan Legislature. Essentially, the act provides for trigger points or benchmarks that local governments must achieve for funding their pension and other post-employment benefits (OPEB) accounts, the largest of which is retiree health care. The ACT, provides for the benchmarks to be achieved by the end of the 2017 fiscal year by municipality.
Municipalities, which include cities, townships, village, counties and other public authorities, must provide the State of Michigan Department of Treasury with a financial report within a timeframe of the end of their fiscal year (June 30, September 30 or December 31). The Treasury Department will review the report and determine the viability of the integrity of the funds based on the percentage of the funds being funded. The trigger points at this time, according to the ACT, are: Pensions 60% and OPEB 40%. If the municipalities fall short of either or both benchmarks and the treasury confirms their deficiency, they can request a waiver of being listed as a deficient municipality.
The waiver must provide information to Treasury that describes the reason for the waiver which should include details related to error in reporting initially and/or steps that were taken prior to or during the time Treasury issued their report of deficiency. Some of these steps could include:
- Reducing the number of employees who are no longer eligible for pensions or other post-employment benefits through collective bargaining or otherwise.
- Changes in retiree health care or other post-employment benefits that will further reduce the cost from the OPEB fund for present and future liabilities
- A transition from a defined pension benefit to a defined contribution pension benefit for new and or existing employees
- Actuarial results that provide evidence of progress relative to the funds revenue increases and/or reduction in costs as well.
There may be other extenuating circumstances or details that can be explained to the Department of Treasury. Those provided above are a sample of what could be provided. The timeline for providing the initial report is after a local government’s fiscal year ends (see timeline hyperlink). Additionally, refer to the linked timeline for corresponding responses to the initial report of deficiency to Treasury. If a municipality is not deficient they are not required to do anything further and Treasury will publish the results of their funds’ integrity for the public to view as a matter of transparency.
Future articles will address the steps that could be taken to remedy deficiencies over time and the public policy process that municipalities may want to consider moving forward.