A closer look at legacy costs and local actions in Michigan in the wake of PA 202DOWNLOAD FILE
January 1, 2020 - Author: Shu Wang, Samantha Zinnes, MSU Extension Center for Local Government Finance and Policy and the Department of Agriculture, Food and Resource Economics
Legacy costs have imposed challenges on local governments in Michigan. The lack of funding for retirement benefits, including pension and other postemployment benefits (OPEB) such as healthcare, affects the wellbeing of public employees, creates a financial burden on local governments, and constrains resources for other essential public services. As one of the first steps to address this problem, PA 202 of 2017 (PA 202), the Protecting Local Government Retirement and Benefits Act, came into effect in 2017 to ensure sustainable funding for local retirement benefits. PA 202 requires local governments that have defined-benefit (pension) retirement plans and/ or OPEB plans to report their pension and OPEB funding information to the Michigan Department of Treasury.
The state Treasurer determines underfunded status for each local government retirement system based on funded ratio and annual required contribution1 (ARC) as a share of local governmental revenue. The Treasurer deems a pension system underfunded if 1) funded ratio2 is below 60 percent and 2) ARC is above 10% of local governmental revenue. In contrast, an OPEB system is underfunded for PA 202 purposes if 1) funded ratio is below 40% and 2) ARC is above 12 percent of local governmental revenue.
Once the Treasurer determines the local government has an underfunded pension or OPEB system (i.e. the local government has “triggered”), the local government must file a corrective action plan (CAP) that outlines the prior and prospective actions taken to address funding issues.
In this report, we first look at the scope of underfunded pension and OPEB liabilities in Michigan. Then, we document the actions that triggered local governments have taken in the past, as reported in the “prior actions” section of their CAPs, and the actions they plan to take in the future, as reported in the “prospective actions” section of their CAPs. We analyze the trends and patterns of these actions taken to address funding issues. We conclude this report with policy implications as well as reporting issues we noted based on our observations.
It is important to note that although we only focus on general-purpose governments (county, city, township, and village) in this study, PA 202 applies to special districts as well and they face the same challenges when it comes to funding retirement benefits.