P.A. 202 of 2017 Overview from the Michigan Department of Treasury - PowerPoint Presentation

Slide1

P.A. 202 of 2017 Overview from the Michigan Department of Treasury

Kevin Kubacki and Dan Horn

Community Engagement and Finance Division

Michigan Department of TreasurySlide2

Today’s Discussion Topics

Retirement system annual report and evaluation process

Waiver Review Process and Criteria

Corrective Action Plans & the Municipal Stability Board

Best Practices

Corrective Action Plan Approval Criteria

In DevelopmentSlide3

Evaluation Process

Form 5572

Waiver Process

(Optional)

Form 5582

Form 5583

Corrective Action PlanForm 5597Form 5598

Corrective Action Plan Monitoring(TBD)

End

Waiver Granted

Not Preliminary Underfunded

Preliminary Underfunded

Underfunded

Status

P.A 202 ProcessSlide4

Form 5572 submission and evaluationSlide5

Evaluation Process

Form 5572

Waiver Process

(Optional)

Form 5582

Form 5583

Corrective Action Plan

Form 5597Form 5598

Corrective Action Plan Monitoring(TBD)

End

Waiver Granted

Not Preliminary Underfunded

Preliminary

Underfunded

Underfunded

Status

Evaluation ProcessSlide6

Underfunded Status Triggers

Public Act 202 provides criteria for underfunded status (Triggers)

Another trigger: Failure to submit the report

*Only applies to primary units (cities, villages, townships, and counties), non-primary units are only based on the funded ratio trigger

Funded Ratio

ARC/Governmental

activity fund

operating

revenue for primary units*

Health system

<40%

>12%

Pension

<60%

>10%

andSlide7

Retirement System Annual Report I

Form 5572 Retirement System Annual Report

Data Source: local units’ most recent audited financial statementsSlide8

Retirement System Annual Report II

Healthcare Tab updated July 2

nd

.Slide9

Data Sources: Audited Financial Statements

Item

Statement

From Financial Statement

Total governmental fund revenue

Statement of Revenues, Expenditures and Changes in Fund Balances – Governmental Funds

Statement of Revenues, Expenditures and Changes in Fund Balances – Governmental Funds

From Notes;

or Required supplementary information

System Assets and Liabilities

For pension: Schedule of Changes in the Net Pension Liability and Related Ratios

For OPEB: Schedule of OPEB Funding Progress and Employer ContributionsADC (Pension)

Schedule of ContributionsARC (Retiree Healthcare)

Other Postemployment BenefitsFrom Retirement System or Local Unit Accounting Records

Payment of retiree insurance payments

Payment of Normal Cost for employees hired after 6/30/18

Speak to your actuary about the calculation and paymentSlide10

Underfunded Status

What happens if underfunded?

Preliminary underfunded status

Apply for a waiver

Submit a corrective action planSlide11

Underfunded Status

Retirement Reviews (Form 5572)

Status Option

Totals

1

Preliminary Underfunded/Waiver

226

Approve

600

Deny

15

Total-Reviewed

841

Pending

36

Total-Submissions

877

1.

As of 7/23/18Slide12

WAIVER Process and Review CriteriaSlide13

Waiver Process

Evaluation Process

Form 5572

Waiver Process

(Optional)

Form 5582

Form 5583

Corrective Action PlanForm 5597Form 5598

Corrective Action Plan Monitoring(TBD)

End

Waiver Granted

Not Preliminary Underfunded

Preliminary Underfunded

Underfunded

StatusSlide14

Underfunded Status Waiver

Local Units of Government, which receive a preliminary review of Underfunded Status:

Have option to submit a waiver request to Treasurer

Waiver(s) must be submitted within 45 days of preliminary underfunded notification

Separate waiver must be submitted for each preliminary underfunded system for wavier to be considered.

Successful waivers may include:Actions already taken to address underfunded status.Proof of Governing Body approving waiver application and plan to address underfunded status.Slide15

Waiver Data

Waivers were reviewed within a narrow scope. Approvals were granted to local units with significant documented actions to address underfunded status in the near term.

PA 202: Waiver Analysis FY 2017

1

Did Not File

Waiver Applications

Retirement Report –

Form 5572

Waiver Application

Recommend Approve

Recommend

Deny

Split

Corrective Action Plans Required

23

29

31

85

10

147

1

Data as of July 2, 2018Slide16

Waiver Criteria I

Prior actions on forms 5582 and 5583 are separated into three categories:

System Design Changes

Additional Funding

Other ConsiderationsSlide17

Waiver Criteria II

System Design Changes (not prospective)

Lower tier of benefits (new and/or existing employees)

Closed the system

Move to defined contributionBridged multiplier

Retiree copayments, deductibles, medicare, etc.Premium cost-sharingEtc.Slide18

Waiver Criteria III

Funding Changes (not prospective)

Voluntary contributions

Bonding

Millage increasesPayment of ARC for retirement health careSlide19

Waiver Criteria IV

Other considerations

Factual errors

Prior actions that were not reflected in audit

ARC/Governmental Revenues for non-primary units is below trigger percentage

- Enterprise funds Documentation demonstrating employee allocationsSlide20

Waiver Criteria V

Additional Criteria

Approval by the local unit’s administrative officer

Documentation of approval from the governing body

Adequate documentation to support waiver application

Certification that your Retirement Health Benefit System will achieve a funded status of at least 40% by

X fiscal year or Retirement Pension System will achieve a funded status of at least 60% by X fiscal yearSlide21

Waiver Determination Process

Possible reasons for waiver approval?

Reviewed within a narrow scope.

Factual Errors

Significant p

olicy actions that have already been implemented but not reflected in CAFR or annual financial report in the near term.Upon waiver decision, waiver approval/denial letter emailed to local unit

Denial reasons are listed in letterMust produce and submit corrective action plan for review by Municipal Stability BoardSlide22

Waiver Review & Corrective Action Plan Guidance

Waiver Review and Corrective Action Plan Guidance Session

https://www.schedulicity.com/scheduling/MTLCMH

Schedule 30 minute review phone call with Treasury

Detail corrective action plan process

Review waiver denial reasons

Detail corrective action plan processSlide23

Corrective Action Plans and the Municipal Stability BoardSlide24

Corrective Action Plan Process

Evaluation Process

Form 5572

Waiver Process

(Optional)

Form 5582

Form 5583

Corrective Action PlanForm 5597Form 5598

Corrective Action Plan Monitoring(TBD)

End

Waiver Granted

Not Preliminary Underfunded

Preliminary Underfunded

Underfunded

StatusSlide25

Corrective Action Plans I

Who must file corrective action plan?

Local units that did not file Retirement System Annual Report (Form 5572)

Local unit was not granted a waiver, their waiver determination was split, or no waiver was filed

Split waiver: at least 1 wavier approved and at least one denied. Must file CAP for denied waiver

Due 180 days after you receive Determination of Underfunded Status and Need for a Corrective Action Plan letterSlide26

Corrective Action Plans II

An underfunded local unit of government shall develop and submit for approval a corrective action plan for review by the Municipal Stability Board.

The local unit of government shall determine the components of the corrective action plan.Slide27

Corrective Action Plan FormSlide28

Three member board (gubernatorial appointees)

One resident of the state representing state officials- Dr. Eric Scorsone

One resident of the state representing local officials – Mr.

Daryl

Delabbio

One resident of the state representing employees and retirees – Mr. Barry HowardMunicipal Stability Board (MSB) ISlide29

Municipal Stability Board(MSB) II

Corrective Action Plans are received by the Municipal Stability Board(MSB)

Within 45 days of receipt of corrective action plan, MSB will vote to approve or deny

Corrective Action Plans that are approved

Approved plans will have letter sent to chief administrative officer

Local unit has 180 days from date of letter to begin implementation of planCorrective Action Plans that are denied:Board will provide detailed denial letter within 15 daysLocal unit must address deficiencies and resubmit a plan within 60 days.Slide30

Best PracticesSlide31

Required to be published annually by PA 202

MSB Adopted Best Practices and Corrective Action Plan (CAP) Approval Criteria at its July Meeting.

Accepting Public Comment through August 9

th

Treas-MunicipalStabilityBoard@Michigan.gov

MSB Best Practices and CAP CriteriaSlide32

Best Practice Principles

The following principles may be utilized in developing a corrective action plan

Plan Funding

Modern Plan Design

Effective Plan Administration/Management

Best PracticesSlide33

Plan Funding

Fund the annual required contribution, which pays the expected cost of all promised benefits for both pension and retirement health systems (i.e. fund the annual service cost of active employee benefits plus any unfunded actuarial accrued liabilities)

Add funding into the annual budget in addition to the annual required contribution(s). This practice will reduce the unfunded liability and allow for potential increased earning interest or investment income.

Dedicate additional revenue sources to pay for retirement benefits (e.g. Public Act 345 of 1937 millage, increased operating millage, other special millage)

Establish a qualified medical trust designated for retirement health system funding

Transfer funds from reserves to increase retirement assets, earning interest, and investment income

Add or increase employee/retiree contributions

Best Practices ISlide34

Modern Plan Design

Defined Benefit Pension

Implement a “bridged multiplier” for active employees

Implement Final Average Compensation (FAC) standards

Reduce or eliminate future defined benefit accruals and enroll active employees into a defined contribution plan or hybrid plan

Limit defined benefit options for newly hired employees, including multipliers, cost of living increases, retirement age, and benefit vesting periodsClose the current defined benefit planEnroll new hires into a defined contribution plan or a hybrid planEvaluate the financial implications of any early retirement incentive buyouts

Limit the dual payment of both a pension and a salary to any employee who is rehired after retirement by the same employer

Best Practices IISlide35

Modern Plan Design

Retirement health systems (OPEB)

Require cost sharing of premiums and sufficient copays

Implement a cap on employer retiree health care costs

Require use of Medicare as primary insurance for retirees 65 and older

Require mirroring of retiree health care plans within the same local unitRequire retirees to use health plans of current employers if available, and spouses to utilize benefits from their employer, if availableEnroll new hires in a defined contribution retiree health care planDo not offer incentive packages for early separation without first considering the costs of the separation on the retirement health system

Raise the eligibility age for retiree health careImplement vesting rules that provide levels of benefits based on years of serviceUse a market driven approach to evaluate benefit offerings and carriers

Best Practices IIISlide36

Effective Plan Administration/Management

Work with system providers to determine appropriate solutions for each local unit

Require all retirement systems to be 100 percent funded before any benefit increases can take effect

Require an experience study by the plan’s actuary at least every five years

Require a peer actuarial audit to be conducted by an actuary that is not the plan actuary at least every eight years, or replace the actuary

Obtain frequent annual required contributions for all retirement systemsDiversify the investment portfolio in consultation with the system providerEnsure proper assumptions are utilized according to actuarial standards of practice

Ensure management and oversight boards have proper experience, skills, and training to administer pension and retirement health systemsUse of asset smoothing in the valuation to reduce the impact of significant investment losses on required contribution amountsImplement a closed amortization period of no more than twenty yearsCalculate amortization payments based on a “level-dollar” amortization scheduleCreate a committee consisting of all stakeholders (employees, retirees, and employer representation) to evaluate options for benefit offerings

Best Practices IVSlide37

Corrective action plan Approval criteriaSlide38

To assist local units in the development of their corrective action plan, approval criteria has been created to demonstrate what the Board will be considering during CAP review

Approval Criteria

Funding Ratios

Reasonable Timeframe

Legal and Feasible

Affordability

CAP Approval Criteria ISlide39

Funding Ratios

Corrective action plans must show through supporting documentation, how and when a retirement system will get to a funded level

60% for Pension Systems

40% for Healthcare Systems

Supporting documentation must include actuarial projection, actuarial valuation, or an internal developed analysis

CAP Approval Criteria IISlide40

Reasonable Timeframe

CAP will allow the local unit to address the underfunded status within a reasonable timeframe

It is understood that all local governments are unique. A reasonable timeframe will be determined on a case by case basis

General guidelines

Pension Systems @ less than 45% funded

Reach 60% within 20 yearsOPEB Systems @ less than 25% fundedReach 40% within 30 yearsProspective actions should have an implementation date assigned

After MSB CAP approval, local unit has 180 days to implementCAP Approval Criteria IIISlide41

Legal and Feasible

CAP must follow all applicable local, state and federal laws

Local Unit must attach approval from governing body

Chief Administrative Officer must certify to implement actions

Must be reasonably achievable

Considering local unit’s current environment, can the proposed changes actually be implemented?Provide details of how

CAP Approval Criteria IVSlide42

Affordability

At a minimum, all local unit CAP’s must certify that they can continue to make the ARC and/or healthcare premium payments, as well as the normal cost payments for new hires

Able to to meet current and future obligations without using a significant portion of budget

Less than 10% for pension and less than 12% for OPEB (ARC/Governmental Fund Revenues)

Ability to offer residents services while meeting legacy obligations

Prefund OPEB to earn interest income and build savings for future paymentsFollow Best Practices to reach affordability

CAP Approval Criteria VSlide43

In DevelopmentSlide44

PA 202 requires the State Treasurer to annually establish uniform actuarial assumptions of retirement systems.

Investment Returns

Salary Increase Rates

Mortality Tables

Discount Rates

Health Care Inflation

Updated assumptions anticipated to be announced in the coming monthsUniform AssumptionsSlide45

PA 202 requires the Municipal Stability Board to monitor each underfunded local unit’s compliance with the Act and any corrective action plans.

Treasury is working with the Board to develop this process.

Corrective Action Plan MonitoringSlide46

Treasury is working to streamline reporting requirements of Public Act 530 and Public Act 202.

Annual Summary Reports for Pension and Retiree Healthcare

Uniform Assumptions

Updated 5572Slide47

www.Michigan.gov/LocalRetirementReporting

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www.Michigan.gov/MSB

Slide49

Email:

LocalRetirementReporting@Michigan.gov

@

MiTreasLocalGov

Thank you!

Questions and Dialogue