CHICAGO — Local governments in Michigan would be able to issue general obligation bonds to cover costs tied to shifting to a 401(k)-style retirement plan as well as for other-post employment benefit liabilities under legislation sent to Gov. Rick Snyder Friday.
Senate Bill 1129 is an effort to aid local governments’ transition to a less-costly employee retirement system and help bring down retirement liabilities, which some local officials say threaten their fiscal stability. The measure moved quickly through the state House and Senate, which approved it last Thursday with only one change since it was introduced in early summer.
“Legislation doesn’t usually move that fast, but this sailed right through,” said Samantha Harkins, director of state affairs for the Michigan Municipal League, which supported the measure.
The one change broadens the measure to allow local governments to issue bonds to cover their OPEB liabilities as well as costs associated from closing their defined-benefit plans. The expanded OPEB bonding authority is a happy ending for supporters who for years have pushed for such legislation.
To qualify for the borrowing, 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. If signed by Snyderr, the new law will help local governments stabilize their long-term retirement costs, according to Harkins.
“That spiking in costs is going to be difficult,” she said. “This will be a long-term cost savings not only for these communities, but also for the taxpayers who are paying for these benefits, which, in their current form, are unsustainable.”
Municipalities that issue bonds under the new legislation must be rated double-A or higher and the Michigan treasurer must approve it. Issuers would be able to pay off all or part of their retirement liabilities with the borrowing. They would have to stay within current debt limits and prove that they can cover the debt payments with general-fund dollars. The bonds would be structured as limited-tax GOs with few other structural restrictions. The first serial or term maturity could not occur later than five years after the date of issuance.
The measure will give local governments another tool and more flexibility to pay down their unfunded accrued liability, independent Senate Fiscal Agency analyst Kathryn Summers noted in a June analysis of the legislation.
“However, the actual resulting fiscal impact is unknown and would depend upon the cost of the security compared to market performance, the impact (if any) on the municipality’s credit rating, and the potential risks associated with converting a ‘soft’ debt of the municipality into a ‘hard’ debt with a rigid and fixed repayment schedule,” Summers wrote.
