Tomorrow, a year from now, or further into the future, as a financial professional, you will be questioned about the funded status of your pension and OPEB plans. How will you respond? What measures will you have taken to maintain fiscal sustainability?

In this article, we examine a comprehensive framework for addressing the increasing concerns of governmental plan sponsors in a post-COVID-19 time. Specifically, what is the potential impact on decision making given the changing nature of work, revenue and long-term investment returns? In a curious way the Michigan Public Act 202, Protecting Local Government Retirement and Benefits Act, which was signed into law in December 2017 addresses those issues.

While it remains to be seen if and how other states or local governments will adopt laws like Michigan Public Act 202 (Act), it provides a strong framework for addressing increasing concerns related to rising long-term costs, recent transparency requirements, and fulfilling benefit promises.

This article provides a brief historical context and an overview of the Act and concludes with a list of helpful considerations for all governmental plan sponsors.

Learning from History – Unfunded and Hidden Promises

Studebaker of South Bend, Indiana ceased operations at the end of 1963. The defined benefit pension plan, seriously underfunded, was terminated. This may have been the signal event leading to the Employee Retirement Income Security Act of 1974 (ERISA). The tax and labor laws were promulgated at that time to establish minimum standards for pension plans in private industry.

Fast forward 50 years to 2013. The City of Detroit filed for bankruptcy having amassed $20 billion of debt. The bankruptcy was the leverage used to substantially reduced pension and postemployment benefits. Riding the wake of the bankruptcy was the creation of Michigan’s Public Act 202.

And today, in the aftermath of COVID-19, the financial market indices are down 20% or more.

Considering also the recent implementation of GASB 68 and 75, which moved liabilities from the small print of footnotes to the body of your balance sheet, we highlight a changing landscape for governmental sponsored plans.

Michigan’s Public Act 202

The basic framework under Michigan’s Public Act 202 includes three stages:

Reporting Requirements

Governments that offer a retirement pension benefit plan and or a retirement health benefit plan must file an annual report no later than six months after the end of the entity’s fiscal year.

The form is completed using information from audit reports, actuarial funding valuations, system investment provider reports, and accounting records.

Review of Funded Status

Pension Plans – A preliminary determination of underfunded status is made if:

• The plan’s total assets are less than 60% of the plan’s total liabilities, and
• The actuarially determined contribution (ADC) exceeds 10% of total governmental fund revenues.

Retirement Health Care Plans (OPEB) – A preliminary determination of underfunded status is made if:

• The plan’s total assets are less than 40% of the plan’s total liabilities; and
• The ADC is greater than 12% of total governmental fund revenues.

Corrective Action Plan – Waivers

A local government that has been determined to be preliminary underfunded may apply for a waiver and must submit a plan approved by its governing body indicating the underfunded status is being addressed (for example, reduced benefits and/or adding additional contributions).

Corrective Action Plan – Municipal Stability Board

A local government whose pension and OPEB plans are deemed to be underfunded (no approved waiver) are required to submit a corrective action plan (CAP) for each underfunded plan and CAP’s are due within 180 days of a determination letter.

CAPs must follow best practices to sustain fiscally stable retirement programs, protect benefits for retirees, and provide high-quality public services to residents. Best practice principles include efforts to improve plan funding, reflect modern plan design, and adopt effective plan administration. These guidelines can serve as a model for all agencies to assess and strengthen retiree pension and health plans.

In addition, an approved CAP shall meet the following criteria:

Where do you stand?

While the Michigan Public Act 202 does not apply to California agencies, it presents a comprehensive list of considerations in order to address the increasing concerns of governmental pension and retiree medical health care benefits during the changing landscape.

Be prepared for tomorrow, a year from now, or further into the future when you are asked about the funded status of your pension and OPEB plans. As Benjamin Franklin said, “By failing to prepare, you are preparing to fail.” Don’t fail, prepare today.

For your consideration, we pose the following questions.

CalPERS COVAD Podcast April 8, 2020

Staff carefully illustrated the 20-year employer contribution curve with various projected investment returns. Gains/losses from investments and other sources are amortized over a twenty-year period which smooths the curve.

While there is a possibility of returning to ‘normal’ in the near future, you may wish to be prepared with a CAP (corrective action plan) for your plans.