Michigan Bill Allows Pension Bonds For Localities That Shut Down Plans

CHICAGO — Local governments in Michigan would be able to issue municipal bonds to pay off their unfunded pension liabilities if they close their pension plans, under legislation passed by the Senate last week.

It would not likely mean a flood of new debt from municipalities, but it would broaden the purpose of limited-tax general obligation bonds to give qualified issuers the ability to borrow to cover their unfunded obligations and avoid a costly penalty that comes from shifting employees out of a pension plan into a 401(k)-style program.

Senate Bill 1129 is part of a wider state effort to bring down local and state pension liabilities, an issue that Michigan municipalities, like governments nationwide, say poses a threat to their future stability.

The measure is modeled on similar Michigan legislation that would allow local governments to issue bonds to cover liabilities for other post-employment benefits such as health care.

Supporters of the OPEB bonding bill have pushed it for years. The Legislature passed it three years ago, but the governor at the time, Jennifer Granholm, did not sign it into law, instead warning that it would mean a drop in the state’s federal Medicaid reimbursement.

Since then, proponents have addressed the Medicaid problem, and the bill has been reintroduced in the House, but without much hope for fast passage, supporters said.

The new bill is a response in part to Gov. Rick Snyder’s push to encourage local governments to shift to 401(k)-style defined-contribution retirement plans.

Snyder has made the shift one of several criteria that allow local governments to win more badly needed state revenue aid.

To qualify for the borrowing under the terms of SB 1129, municipalities would have to agree to close their defined benefit plans. They would have the option of switching employees to a defined contribution plan, but could not increase the benefit levels of the closed defined-benefit plan once the bonds have been issued.

Converting to a defined-contribution plan forces the government to pay more in up-front costs, as it triggers accelerated payments under the actuarial accounting method used by Michigan. The new borrowing authority is one way to avoid that penalty, supporters said.

Officials from Northville, a town of 6,000 about 35 miles outside of Detroit, are pushing for the ability to bond as a way to avoid the payment spike.

Northville has been closing its various defined-benefit plans for years, and, under state accounting rules, will see its annual contribution jump to $1.2 million starting in 2016 from around $700,000 now.

Issuing bonds would level out the town’s payments at around $570,000 through 2027, when contributions would drop to around $300,000 and continue to decline through 2032.

“It would help us balance our budget tremendously,” said Sandy Wiktorowski, Northville’s finance director.

After passing the Senate last week, the bill is now in the House Appropriations Committee.

The Michigan Municipal League is meeting with representatives over the next few weeks to lobby for the measure, said Summer Minnick, the league’s director of state affairs.

“We’ve worked very hard on this [bill],” Minnick said. “It’s always important for our communities to have options when it comes to significant funding obligations, and bonding in this case makes a lot of sense.”

Under the measure, issuers would be able to pay off part or all of their pension liabilities with the borrowing. They would have to stay within current debt limits and would have to prove that they can cover the debt payments with general fund dollars.

Local officials would need to submit a financial payment plan to the office of the state treasurer, which would approve the issuance. The plan would include an analysis of the retirement obligations, and evidence that the borrowing, along with other general fund dollars, would eliminate the unfunded liability, among other things.

Republican lawmakers also inserted an amendment that bans issuers who bond for the liability from increasing the benefit structure of the defined-benefit plan.

Municipalities that are already struggling with budget strain are not good candidates for the borrowing, officials said.

“If that spike is there, this gives some communities with relatively healthy balance sheets a good tool,” said David Massaron, an attorney with Miller Canfield PLC who helped craft the legislation.

“The state itself, through the incentive revenue-sharing program, is encouraging communities to move to a defined contribution plan,” Massaron added. “If the conversion causes a spike in your required payments, you can spread it out over a number of years.”

The bonds would be structured as limited-tax GO obligations with few other structural restrictions.

The debt could be issued serially or with fixed mandatory redemptions, though the first serial or term maturity could not occur later than five years after the date of issuance.

The original measure allowed municipalities to issue unlimited-tax GO bonds that exceeded their debt limit with voter approval, but the Senate removed the provision as the bill wound its way through the committee process.

“We had to be cognizant of the Legislature we’re dealing with, which is very skeptical of bonding at all,” Minnick said.

Treasury officials who testified at the appropriations committee hearing said they were neutral on the bill, but warned that bonding for the pension contributions would shift a so-called soft liability into a hard one.

It’s a point also raised by Kathryn Summers, who analyzed the bill as a fiscal analyst at the nonpartisan Senate Fiscal Agency.

“These are interesting financially because you turn what is basically your own pension debt into a hard debt,” Summers said.

“Instead of just paying yourself back now, you have to make a debt-service payment and that has to be done,” she said. “What happens if you dump it all into the market and the market tanks?”

The push for pension reform on the local side comes as lawmakers continue to debate reforms to the state’s massive teacher retirement system.

The Michigan Public School Employees’ Retirement System is the state’s largest retirement system. It has a pension and OPEB liability totaling $45 billion.

Lawmakers for months have debated legislation that would trim the state’s contributions. Both chambers have passed bills to double health insurance premiums for school retirees, eliminate retiree health coverage for new employees and make a $130 million pre-funding OPEB payment in fiscal 2013.

But the two GOP-led chambers disagree over whether to completely close the defined-benefit plan to new school employees. The Senate passed a bill that would close the plan. The House, however, last Thursday passed a measure that would allow the option of a 401(k)-style plan but not force the move.

The Senate was expected to take up the measure Thursday but failed to vote on the measure.

A final vote could now be postponed for months, as the Legislature has largely adjourned for the summer, with only two one-day sessions set for July and August before returning in September.

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