pension and retiree health care (opeb) local government ... · 8/18/2020 · local government...
TRANSCRIPT
Pension and Retiree Health Care (OPEB) Local Government Retirement Webinar
Tuesday, August 18, 2020
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Welcome & Introductions
Heather FrickBureau Director,
Bureau of Local Government and School Services, Department of Treasury
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Michigan Local Pension and Healthcare Systems: Updates,
Economic Impacts and Resources
Kerrie Vanden BoschCEO,
Municipal Employees Retirement System (MERS)
Michael VanOverbekeLegal Counsel
Michigan Association of Public Employee Retirement Systems (MAPERS)
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Michigan Local Pension and Healthcare Systems:
Updates, Economic Impacts and Resources
Kerrie Vanden Bosch, CEO, MERS
Responsible Funding Practices• Required contributions are calculated by an accredited
actuary using assumptions about future events• Assumptions fall into two categories — economic and
demographic• Each year if actual experience is different from the
assumptions, gains or losses are recognized on a fixed amortization period
• As part of our fiduciary responsibility, we check assumptions at least every five years through an Experience Study
MERS of Michigan | 6
Key Assumption Changes • In 2019, economic assumption changes:
– Lowered the investment rate of return assumption from 7.75% to 7.35%
– Lowered the wage inflation assumption from 3.75% to 3.00%
• Early 2020, demographic assumption changes:– Updated mortality tables – Moved to generational mortality improvement – Updated retirement and withdrawal rates
MERS of Michigan | 7
Key Takeaways • Adjustments reflect changes in trends, rather than anomalies that would
cause an overcorrection to plans
• In today’s ever-changing world, we expect incremental changes to ensure MERS plans are continuing to be adequately funded
• Trends in people living longer and mortality improvement will impact contributions and funded levels
MERS of Michigan | 8
Navigating Investment Markets • Recent, unprecedented volatility in the markets
• Mature pension plans must balance the need to pay pension benefits while continuing to grow
• Diversification reduces exposure to volatility through a variety of investments that are unlikely to all move in the same direction
MERS of Michigan | 9
As of December 31, 2019
MERS Long-Term Investment Returns
All rates are shown as gross of fees
MERS of Michigan | 10
Forecasting Tools• Contributions are calculated based upon assumptions about future events
which may or may not materialize• The Annual Actuarial Valuation provides alternative scenarios and
projections to assist with planning:– More conservative investment outcome (5.35% vs 7.35%)– Estimated impact of demographic assumption changes
• MERS strongly encourages employers to contribute more than the minimum required contributions
MERS of Michigan | 11
Short-Term Impact Relief
MERS of Michigan | 12
Optional Phase-In
• For those that need more time, there is an option to phase in the assumption changes over four years
Amortization Extension
• Local units may request an analysis to determine if an amortization extension is possible
• Extending the amortization period defers costs into the future, resulting in higher long-term costs
Funding StrategiesCost sharing
– 2/3 of MERS plans have employee contributions
– May not make a large impact to UAL for retiree-heavy divisions
Voluntary contributions– As an invested account, the power of
compounding rewards pre-funding– Employers determine how additional
voluntary contributions are appliedo Establish surplus divisions to
pay down UALo Reduce future contributions by
applying to specific division
Bonding– May bond for all or a portion of
unfunded accrued liabilities —pension or OPEB
– No guarantee that future unfunded liabilities will not occur
Since 2016
626divisions have increased cost sharing
2,039 divisions made voluntary contributions
municipalities have bonded12
MERS of Michigan | 13
Plan Design Strategies
MERS of Michigan | 14
• Higher retirement age• Defined Benefit Plan with lower provisions• Hybrid Plan • Defined Contribution Plan
Reduce Future Liability for New Hires
• Lower multiplier going forward• Eliminate COLA on future service
Reduce Future Liability for Existing Employees
• Plan freeze
Eliminate Accrual of Future Liability
Resources to Learn More
MERS of Michigan | 15
• MERS Retirement Conference– September 21-24
• www.mersofmich.com– Dedicated webpages
o Annual Actuarial Valuations (AAV)o Experience Study
– Recorded Experience Study & Investment Update webinar
– Video library
• Review options with your Regional Manager
Contacting MERS of Michigan
MUNICIPAL EMPLOYEES’ RETIREMENT SYSTEM
1134 Municipal WayLansing, MI 48917
800.767.MERS (6377)www.mersofmich.com
This presentation contains a summary description of MERS benefits, policies or procedures. MERS has made every effort to ensure that the information provided is accurate and up to date. Where the publication conflicts with the relevant Plan Document, the Plan Document controls.
MERS of Michigan | 16
Pension and Retiree Health Care (OPEB)Local Government Retirement Webinar
Tuesday, August 18, 2020
Michigan Local Pension and Healthcare Systems: Updates, Economic Impacts and Resources
Michael VanOverbeke, General CounselVanOverbeke, Michaud & Timmony, P.C.
Michigan Association of Public Employee Retirement SystemsTomorrow’s Future Through Today’s Education
What is MAPERS?Michigan Association of Public Employee Retirement Systems
• Established in 1949 to provide educational training and legislative updates to trustees of Public Employee Retirement Systems and Retiree Health Care Plans within Michigan.
• Recognized as the principal educational, legislative forum for trustees, plan administrators, and other retirement and financial professionals in the state.
• Membership represents 115 public pension and retiree health care plans in Michigan. Thesesystems invest over $60 billion in public pension plan assets and administer pension and retireehealth care benefits to over 250,000 retirees and nearly 500,000 active public employees.
• Applicable law mandates that Trustees of governmental plans are fiduciaries and are obligated to act consistent with prudent and fiduciary standards of conduct in the administration of their pension plans.
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MAPERS Resources
• Conferences (Spring, Fall One-Day)
• Webinars• Latest News (State & Federal
Legislative Updates, Executive Orders)
• CAP Program
• Legal Reports (IRC Updates, Recent Court Rulings)
• RFP & Job Board Listings• Listserv Forum and Surveys• RFP Samples
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MAPERS Past Webinars
• "MAPERS 2020 Recent Legal Issues and Decisions Update” Speaker: Aaron Castle, VanOverbeke, Michaud & Timmony, P.C.
• “Funding Public Pensions Post-Pandemic Preparing for the Second Wave of COVID-19 Financial Fallout” Speakers: Biagio Manieri, Ph.D. CFA, Jim Link, and Dan Kozloff, PFM Asset Management
• "The Aftermath of COVID-19” Speaker: Ronald Temple, Lazard Asset Management
• “Michigan Public Pension Roundtable -Presented by BlackRock” Speakers: Andrew Citron, Mike Pyle, Mark Everitt, Calvin Yu
• "COVID-19 and the Impact on the Market“ Speaker: Daniel McCormack, Macquarie Infrastructure
• "The Actuarial Perspective on the Market Downturn“ Speaker: Becky Sielman, FSA, Milliman
• "Michigan and Government in Crisis: the State of the Budget and Government in Lansing in COVID-Mode“ Speakers: Noah Smith and Ben Bodkin, MAPERS Lobbyists
• "Best Practices for Virtual Board Meetings“ Speaker: Michael VanOverbeke, MAPERS Attorney
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Recent Trends and Plan Considerations
• Funding Policy Considerations• Plan Re-Design Initiatives• Five (5) Year Actuarial Experience Studies• Setting Every Community Up for Retirement Enhancement Act
of 2019 (the “SECURE Act”) was part of the spending bills signed into law on December 20, 2019.
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Funding Policy Objectives & Goals
• Main financial objective of public employee defined benefit plans is to fund the long-term costs of the promised benefits to plan participants.
• The principal goal of a funding policy is that future contributions and current plan assets should be sufficient to provide for all benefits expected to be paid to members and their beneficiaries when due.
• The funding policy should seek to manage and control future contribution volatility to the extent reasonably possible, consistent with other policy goals.
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Funding Policy Objectives & Goals
• An actuarial funding policy should identify key risk areas that add to contribution volatility and identify ways to manage those risks, including investment risks, demographic risks, benefit/plan design risks and governance risks.
• A funding policy should also address the governance roles and responsibilities of the administrative decision makers.
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Funding Policy Objectives and Goals
• The funding policy should describe the principles and practices thatguide the funding decisions, including the reasons for selecting theactuarial methods and assumptions; and the policies related toresponding to changes in plan experience.
• The funding policy should consider the principle ofintergenerational equity – pension costs should be allocated totaxpayers on an equitable basis over time.
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Components of a Funding Policy
The key principal elements of a funding policyinclude:
Actuarial cost method Actuarial assumptions Asset valuation method Amortization method Funding target Risk management
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Covid-19 Plan Considerations
• Governor’s Executive Orders (Open Meetings Act & Freedom of Information Act)
• Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and related IRS Notices (March 27, 2020)
• Service Credit/Employee Contribution Issues related to COVID workplace/workweek reductions
• Long term implications of market losses
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Questions?Presented By:
Michael J. VanOverbeke, General CounselMichigan Association of Public Employee Retirement Systems
VanOverbeke, Michaud & Timmony, P.C.79 Alfred Street
Detroit, MI [email protected]
Retirement Pension and Retiree Healthcare: Problem Solving,
Managing the Costs and Liabilities, and Revenue
Solutions Related to Legacy Debt
Stephanie LeiserLecturer,
University of Michigan CLOSUP
Samantha ZinnesLaw Fellow
Michigan State University Extension
Tim MichlingResearch Associate
Citizens Research Council
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Harlan GoodrichMunicipal Finance Section ManagerBureau of Local Government and School Services, Department of Treasury
Local Pensions and OPEB:Problems and Solutions
Samantha Zinnes, MSU ExtensionStephanie Leiser, CLOSUP - University of Michigan
Timothy Michling, Citizens Research Council
Pre-COVID: What do we know?
•48% of local governments think pension/OPEB costs are a “very important” factor contributing to local fiscal distress.
•58% of counties•60% of local governments with over 30,000 residents•56% of local governments in the southeast Michigan region
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History and context● Pensions
○ 1875 - The American Express Company○ 1942 - Wage and Salary Act○ 1974 - Employee Retirement Income Security Act (ERISA)○ 1978 - Revenue Act of 1978, Section 401(k)
■ The shift from defined benefit to defined contribution● Health Insurance
○ The Great Depression and the advent of health insurance○ Fringe benefits and the growth of employer-sponsored health plans
● OPEB: A ballooning unfunded liability○ Lack of pre-funding○ Difficult to anticipate growth in the cost of healthcare
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2015 MPPS
Actions to control pension plan costs
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2015 MPPS
Actions to control OPEB costs
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CAP Updates on Pension Actions
● Pension○ Other popular actions--employer (local government) making additional
contributions or paying out lump sums■ With the current public health emergency, it may not be feasible for
locals to use this method to increase funded ratio○ Another action is the use of enterprise funds. Some locals have argued
that, when pensions are provided to employees who are supported by enterprise funds, locals should be able to transfer enterprise funds to governmental revenues, which, in turn will prevent the government from triggering under PA 202
● Pension obligation bonds can only be issued for closed pension (or OPEB) systems 34
CAP Updates on OPEB Actions
● Popular OPEB Actions○ Closing an OPEB fund (or the equivalent in a PAYGO OPEB system) is a
popular action○ Creating a qualified trust to prefund OPEB obligations
■ This is similar to how pensions are pre-funded (in contrast to the PAYGO way to pay for OPEB)
■ The Government FInance Officers Association (GFOA) recommends local governments prefund OPEB obligations as opposed to the local making contributions at the same time the benefits and expenditures and expenses become due● Pre-funding is not always possible or practical though
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(Limited) options for controlling pension/OPEB costs
Most locals could: Some locals could: State-level policy change would be required for:
● Plan funding (assets)○ Voluntary
contributions above ARC
○ Dedicated revenue source
○ Use OPEB trust● Plan design (liabilities)
○ Set up OPEB trust
● Consider OPEB benefit modifications
● Issue pension obligation or OPEB bonds
● Expand use of POBs● Extend amortization
period● Special extended
amortization for 2020 losses
● Relax PA 202 requirements
● Allow moratorium on contributions 36
Post-COVID: What can we expect?
Heightened volatility, risk, and uncertainty
● Widened “margin of error” around key assumptions○ Assumed rate of return - currently capped at 7%○ Healthcare inflation
● Even fully funded plans could find themselves with unfunded liabilities ● Mitigating role of actuarial valuation and implementation lags, asset
smoothing● Will require focus on proactive management rather than compliance
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● There is an intergenerational risk and cost transfer when it comes to pension/OPEB, especially in terms of bonding, with the burden transferred from the government and current residents to future residents.
● Due to the short-term nature of government budgeting, there is a tendency to shift risk to future generations. By focusing exclusively on the short term, the future tends to be discounted.
Intergenerational considerations
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Health care and OPEB considerations
● Health benefit restructuring○ Managed Care○ HSAs and wellness plans○ Targeted cost-sharing
● The age factor○ Increasing required years of service/age of eligibility○ Medicare plans○ Medigap policies
● Benefit modifications aren’t necessarily benefit reductions○ Cost, access, and quality○ Managing beneficiary satisfaction
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Pension/OPEB Bonds
Engagement. Service. Improvement.
Harlan GoodrichMunicipal Finance Manager
August 18, 2020
Pension/OPEB Bonds
• Pension and Other Post-Employment Benefit (OPEB) Bonds
• Bonds issued to finance an unfunded pension/OPEB liability
• Treasury does not advocate for or against the issuance of pension/OPEB bonds – that is a local decision, with the risks/rewards being weighed by the local governing body.
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Pension/OPEB Bonds
Sources: 3
Statutory Authority
• Revised Municipal Finance Act, Public Act 34 of 2001
• Section 518 added October 17, 2012 (Public Act 329 of 2012)
• Section 518 sunsets December 31, 2023
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Statistics
• Treasury has approved 27 pension applications for $613 million.
• 13 counties, 3 townships, 11 cities• Largest $81 million, Average $22 million,
Smallest $2 million• 3 AAA, 22 AA, 2 A
• Treasury has approved 9 OPEB applications for $934 million.
• 2 counties, 1 township, 6 cities• Largest $350 million, Average $103 million,
Smallest $7 million• 1 AAA, 8 AA
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Statutory Requirements
1 of 3
• County, City, Village, or Township• Close Defined Benefit Plan and open Defined
Contribution Plan (not hybrid)• Hybrid Plan = Defined Benefit Plan• Prepare Comprehensive Financial Plan (CFP)• Governing Body approves CFP• Post CFP on website and make available for
review at Clerk’s office• Publish notice of intent in local newspaper,
wait 45 days for possible petition for referendum
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Statutory Requirements
2 of 3
• Credit rating of A-/A3 or higher• Plans with 100+ members shall have a
review of benefits within one year prior to bond issuance (are members receiving the benefits they’re supposed to be receiving)
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Statutory Requirements
3 of 3
• Can issue bonds up to an amount adequate to fund your plan up to 95% for pension bonds and up to 60% for OPEB bonds. Example: If your pension plan has assets of $50 million and liabilities of $100 million, it can issue up to $45 million in pension bonds(50 + 45 = 95/100 = 95% funded)
• Can’t change benefit structure or rescind closure of DB plan after bonding
• Bonds shall not mature beyond date final amortized pension/OPEB payment would have been made receiving)
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Comprehensive Financial Plan
1 of 3
• Analysis of all pension and OPEB plans, including those being bonded for and those not being bonded for
• Debt limit calculation (10% of SEV)• Bonds shall not capitalize interest• Bonds shall not fund past due Actuarially
Determined Contribution (ADC) payments• Level or descending annual debt service
payments• NPV savings of at least 15% of par for pension
bonds and 20% of par for OPEB bonds – see Treasury approved NPV savings calculation
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Net Present Value Savings Calculation
Sources: 10
Comprehensive Financial Plan
2 of 3
• Comparison of current rate of return assumption to actual rate of returns for past year, 5 years, and 10 years
• The following acknowledgment: Since the actuarial value of the defined benefit plan or postemployment health care plan’s assets and liabilities are subject to change, the county, city, village, or township acknowledges that it is possible the unfunded accrued pension liability or unfunded accrued heath care liability may increase after the issuance of the municipal security, thereby requiring the county, city, village, or township to make additional actuarially determined amortization payments to the defined benefit plan or postemployment health care plan beyond the principal and interest payments due on the municipal security.
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Comprehensive Financial Plan
3 of 3
• Certification that 100% of total ADC payments over the past three years have been made (per most recent audit, pension only)
• Certification of compliance with Public Act 202 of 2017, the Protecting Local Government Retirement and Benefits Act.
• Certification that the CFP is complete and accurate.
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Interested in Bonding?
• Call or email to discuss• 517-335-7469• [email protected]• Michigan.gov/MunicipalFinance• Bulletin 11• Contact Bond Counsel and Financial Advisor
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Applying to Treasury
• Application for State Treasurer’s Approval to Issue Pension or Other Post-Employment Benefits (OPEB) Long-Term Securities (Form 5366)
• Budget 75 days to receive Treasury approval (application in, approval letter out)
• Meeting between municipality and Treasury staff in Lansing to discuss the bond issuance and address any questions.
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Items to Submit 1 of 2
• Application – Form 5366• Qualifying Statement (compliance letter if
needed)• Local Governing Body Resolution Approving
Bond Issuance (certified by clerk)• Certification of plan benefit review (100+
members)• Local Governing Body Resolution Approving CFP
(certified by clerk)• Comprehensive Financial Plan • Proof of Notice of Intent and Certificate of No
Referendum (45 days)
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Items to Submit 2 of 2
• Documentation of credit rating• Debt Service Schedules• NPV Savings Sensitivity Analysis• Filing Fee• Prior to bond issuance, notification of
funding methodology (actuarial value of assets or market value of assets) and par amount of bonds
• After bond issuance, file a Security Report and supporting documentation
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Debt Service Schedules
• Provide debt service schedules for:• Current Interest Rate• Current Interest Rate plus 50 basis points• Current Interest Rate minus 50 basis points
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Net Present Value Savings Sensitivity
Analysis
• Use debt service schedules and the following to calculate NPV savings:
• Expected Plan Rate of Return• Expected Plan Rate of Return minus 100 basis
points• Expected Plan Rate of Return minus 200 basis
points
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NPV Savings Current IR Current IR+50 BPS Current IR-50 BPS
Expected UAL ROR
Expected UAL ROR-100 BPS
Expected UAL ROR-200 BPS
Actuarial Value or Market Value?
• Actuarial Value determined from most recent actuarial report
• Market Value determined within 150 days of issuance
• If issuing on the higher of the two UAL values, provide an explanation in the CFP
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Other Things
• Do not have to close all divisions to bond; however, may only bond for closed divisions
• Bonds are federally taxable and state tax exempt
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Public Act 202 of 2017: Reporting Data, Resources, and Next
Steps
Daniel HornAnalytics and Outreach Section Manager,
Bureau of Local Government and School Services, Department of Treasury
Nicholas BrousseauDepartmental Analyst
Bureau of Local Government and School Services, Department of Treasury
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Public Act 202 of 2017: Reporting Data, Resources, and Next Steps
Engagement. Service. Improvement.
Community Engagement and Finance Division
Daniel Horn, Analytics and Outreach Section Manager
Nick Brousseau, Analytics and Outreach, Analyst
August 18, 2020
Today’s Discussion Topics
•Reporting Data•Local Government Resources
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FY 2019 Local
Government Retirement Reporting
No Retirement Submission,
3%
Not Underfunded,
71%
OPEB Underfunded, 11%
Pension and OPEB
Underfunded,5%
Pension Underfunded, 10%
No Retirement Submission Not UnderfundedOPEB Underfunded Pension and OPEB UnderfundedPension Underfunded
*2019 reporting is comprised of approximately 75% of total reporting local governments. Numbers subject to change56
FY 2017-2019 Pension Systems Avg. Funded %
79.8%
68.0%
71.4%
63.1%
75.4%
76.0%
72.9%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%
Authority
City
County
Road Commission
Township
Village
Total Statewide
2017 Pension Funded Ratio (Avg) 2018 Pension Funded Ratio (Avg) 2019 Pension Funded Ratio (Avg)**2019 reporting is comprised of approximately 75% of total reporting local governments. Numbers subject to change.
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FY 2017-2019 OPEB Systems Avg. Funded %
75.9%
41.9%
45.0%
47.6%
34.5%
32.1%
47.2%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
Authority
City
County
Road Commission
Township
Village
Total Statewide
2017 OPEB Funded Ratio (Avg) 2018 OPEBFunded Ratio (Avg) 2019 OPEB Funded Ratio (Avg)*
*2019 reporting is comprised of approximately 75% of total reporting local governments. Numbers subject to change.58
Unfunded ($0 Assets) OPEB Systems 2017-2019*
*2019 reporting is comprised of approximately 75% of total reporting local governments. Numbers subject to change.
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53
7
5
19
8
103
0 50 100 150 200 250
Authority
City
County
Road Commission
Township
Village
Statewide Total
2017 2018 2019 Total OPEB Systems: 53059
Local Government
Resources
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Retirement Guidance Sessions and Resources► Individualized Reviews https://www.schedulicity.com/scheduling/MTLCMH
Schedule 30-minute review phone call with Treasury Topics Understanding reporting requirements Waiver development and criteria Developing corrective action plan(s) Corrective action plan monitoring
►Best Practices: Published annually by Municipal Stability Board Plan Funding Modern Plan Design Effective Plan Administration
►Questions can also be sent to: ►[email protected] 61
Waiver Applications
►Local government demonstrates that even though underfunded status was triggered, it is already being addressed.
►Waiver Criteria:• Mistake in the filing process • Updated data (More recent valuation)• Underfunded status will be addressed within four years• (ADC) less than 10%/12% for non-primary• New: Demonstrate improvement in their underfunded
status compared to previous waiver application• Failure to show improvement (funded ratio or annual cost
ratio) may result in waiver denial and corrective action plan• New: Failed to report an ADC in audit
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Waiver Approval Overview
FY 2019 Waiver Reviews37 Total Waiver Application Reviews (33 Approved/4 Denied)
20 waivers approved for demonstrating 40%/60% funded within 4 years; or valuation documents funded ratio currently above 40%/60%
9 waivers approved for non-primary governments that have indicated the ADC as a percent of revenue is below 10%/12% and would not have triggered if a primary government
Does the local government’s valuation show it reaching 60%/40% in the next 4 years?
Using a valuation’s actuarial value of assets (smoothed assets), is the local government currently above 60%/40%?
If the local government is a non-primary government (Authority, Road Commission, Housing Commission, etc.…), is the ADC as a percentage of revenues less than 10%/12%?
If the local government was provided a waiver in a previous year, has either the funded % or ADC/Revenue % improved?
Provide supporting documentation!
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Approved waivers must be renewed each year until underfunded status is addressed.
Corrective Action Plan Approval Criteria
► To assist local units in the development of their corrective action plan, Best Practices and Approval Criteria have been created to demonstrate what the Board will be considering during CAP review
► Approval Criteria1) Underfunded Status2) Legal and Feasible3) Affordability
► Local governments are free to submit revisions to their plans at any time, or during the monitoring process
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Corrective Action Plan Monitoring Certification Criteria
► PA 202 states that underfunded local governments approved corrective action plan shall be monitored for compliance every two years First monitoring reviews to begin in late 2020
► Certification Criteria1) Underfunded Status2) Substantial Changes3) Sustainability
► Local governments are free to submit revisions to their plans at any time, or during the monitoring process
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Contact & Website InformationWebsites: • www.Michigan.gov/Treasury
• Sign up for Email Alerts
• Treasury Local Government Website
• Treasury COVID-19 Updates for Local Governments and School Districts
• Local Retirement Reporting
• Municipal Stability Board
• www.michigan.gov/revenuesharing
• www.house.mi.gov/hfa/Consensus.asp
Contact Information:• View Treasury Local Government
Contact List
• Michigan Finance Authority (MFA): [email protected]
• Revenue Sharing: [email protected]
Questions
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@MITreasury 68
www.michigan.gov/CEFDwww.michigan.gov/treasury