Local governments are urged to shore up their retirement system ratios in the coming decades but would not face penalties if they fall short, under recommendations proposed by the Michigan Stability Board.
The board is taking public input until next week on the newly released guidelines for correcting underfunded pensions. The board estimates total statewide unfunded pension liability at $10.2 billion. The total retiree health care unfunded liability was estimated to be $10.1 billion.
It has identified more than 110 out of 490 local units of government as having an underfunded pension plan or retirement health care plan — or both.
The stability board, put in place through state legislation, last week released a set of best practices and guidelines for local governments charged with putting together corrective action plans to tackle underfunded pensions, retirement health care plans or both.
“This guidance is a starting point for problem-solving an entity’s underfunded retirement benefits and developing a corrective action plan,” Acting Deputy State Treasurer Anne Wohlfert, head of the State and Local Finance Group, said. “The board is looking forward to receiving feedback on this document from individuals and other stakeholders in the search of solutions to ensure the long-term financial health of our local units of government.”
The board has based its best practices on three key principals: plan funding, modern plan design, and effective plan administration and management.
It has also put in place a time frame for local governments to correct underfunding. If a pension system is less than 45% funded the MSB wants to see it 60% funded by no longer than 20 years from now. For a retiree healthcare system that is less than 25% funded, the MSB is recommending it reach 40% funded within 30 years.
Eric Lupher president of the Citizens Research Council of Michigan, an independent policy research organization said that the methods used to push municipalities to address underfunded pensions isn’t practical.
“To identify these best practices and say that the state is going to encourage movement of these directions while the local governments have to negotiate many of these things in collective bargaining is a disconnect,” Lupher said in a phone interview.
Lupher said that gaining 15 percentage points in the time frame recommended doesn’t “set the bar very high.”
“If we are going to aim to get these systems funded, let's encourage real action to do it in a quicker time frame and actually healthy level,” Lupher said. “I imagine that the reason that they set such low bars is that they are saying we want you to fox your system but we are not going to give you more money to do so. Without real revenue to bleed into the system these 15% points that they identify are probably as good as they can hope for.”
Chris Hackbarth, director of state and federal affairs at the Michigan Municipal League, said during a webinar hosted by the league that legislators will be looking closely at the process.
“One of our fears at the municipal league is that if there isn’t compliance and folks are ignoring the law, we do run the risk of legislature stepping in and mandating different changes,” Hackbarth said. “Certainly in regards to pension funding, if communities are not funded appropriately there are existing measures in the law to address emergency fiscal issues that treasury already has in place.”
Hackbarth said local governments won’t face fines or penalties under the current legislation. The MSB was originally envisioned as holding broader powers to implement a plan of action. It was settled through legislation that the board would function more as an information gathering exercise in which local governments would be asked if they are behind in funding and what sort of action they would take.
“From our perspective this is also a transparency piece of legislation,” said Dan Horn a budget analyst at the State Budget Office of Michigan during the league webinar. “We are trying to work with local governments as much as possible to problem-solve for these difficult issues and to put some solutions on paper and in place that folks can point to and be able to rely upon so that we don’t have to potentially go down the road on what might happen with non-compliance.”
The issue of pension/OPEB reform has dominated the Michigan legislative landscape over the last few years, culminating with Gov. Rick Snyder creating a work group that produced a report that led to legislative action.
The state in December enacted Act 202, which provides for thresholds on pensions and OPEB that all municipalities must meet in order to be considered funded at a viable level. For retiree health care, a plan is considered underfunded if its obligations are less than 40% funded and if its annual contribution is more than 12% of the unit's revenue. A pension plan is considered underfunded if it's below 60% funded and if the unit's annual contribution is more than 10% of its revenue.