Task Force's recommendations
In his January 2017 State of the State address, Governor Rick Snyder announced the creation of a task force focused on addressing the unfunded pension and retiree health care liabilities (OPEB) of local governments in Michigan.
The report finds that the severity of this problem varies widely, as every local government in Michigan is unique. Today local governments already utilize a variety of retirement plans, and the majority of communities have already taken proactive steps to address their situations. This is why the solution must be flexible to focus on the communities experiencing the greatest fiscal stress.
Below is a summary of the task force's recommendations:
Transparency, Reporting and Requirements
Efforts to identify and resolve the underfunding problems need to begin with a sound understanding of the current liabilities and funding situation. The collection of reliable data would allow policy and governance decisions to be based on an analysis of where and how communities have successfully addressed these issues.
For efficiency and ease of administration, information can be collected electronically via Form F-65 which is a current requirement.
Comparing data across local units can be difficult today due to the use of different assumptions. Thus, for reporting purposes only, local governments should adhere to a consistent set of assumptions that will be set by the Department of Treasury annually.
To allow easy access to this data, the Department of Treasury should post the reported data to a newly created Local Government Dashboard.
Actuarial Due Diligence
Local units should conduct an actuarial experience study at least every five years, with a peer actuarial audit or rotation of actuaries at least every eight years. As in current law, exceptions would exist based upon the size of the local unit or plan.
In addition to meeting the current constitutional and statutory requirements for funding pension plans, going forward, all local governments should begin to prefund OPEB for new hires. The report finds that, by far, liabilities from OPEB plans remain the biggest challenge facing local units.
If a local unit does not make either of these payments, they would then go directly to Stage 3 for an in-depth review by the Department of Treasury.
Identify Potential Problem
A critical stage of this system is identifying where problems exist. This stage includes initial criteria to determine the general fiscal health of the local unit's pension and OPEB systems as well as the fiscal stress, if any, that may be put on the local unit's overall ability to provide services. The majority of local units are NOT expected to fall into this criteria, and therefore, their participation in this process would end for the year.
Pension Criteria #1: Less than 60% funded
Pension Criteria #2: Employer Contribution is 10% or more of government wide revenue
OPEB Criteria #1: Less than 40% funded
OPEB Criteria #2: Employer Contribution is 12% or more of government wide revenue
Review for Pension and OPEB Fiscal Stress
It is recognized that the majority of local units have already taken steps to address their unfunded liability. Thus, if the local unit falls into the criteria outlined in Stage 2, but already has a plan in place for how they will continue to fund their plan over time, they may file an application for waiver to Treasury. This plan must have been approved by the local unit's administrative officer and local legislative body, to ensure support.
If a waiver is not requested or is requested but not approved, Treasury will confirm that a problem exists and that further action is needed.
Corrective Action Plan
In order to develop a plan that meets the needs of the individual unit, a full review of all pension and OPEB contracts and financials must take place. A newly created Municipal Stability Board would develop a list of best practices and strategies that would assist local communities in developing their Corrective Action Plan.
It is understood that best practice plan designs are developed in an ever-changing world, while legislatively-mandated plan designs become quickly outdated.
This board would be comprised of appointed members representing state and local officials, as well as employee/retiree representative(s). Appointees must have strong technical knowledge of retirement systems, practices, policies and law.
The goal of the Corrective Action Plan is to meet the criteria outlined in Stage 2. The timeline for implementation should be determined on a case-by-case basis.
The local unit and the Board must agree on a uniquely constructed plan that enables the local unit to work toward financial stability, while providing critical services to residents.
For a summary of the Task Force recommendations, click here.
To view the full report, click here.
Task Force Updates
Update - July 18, 2017
MERS applauds bipartisan taskforce report
Findings support tailored approach and embraces fiscal best practices
Chris DeRose, CEO of the Municipal Employees' Retirement System of Michigan (MERS) today applauded Gov. Rick Snyder's Responsible Retirement Reform Task Force report and urged lawmakers in both parties to consider its important findings.
"Since every local government is unique and already utilizes a variety of retirement plans, there is no one size fits all solution to retirement reform and this task force report underscores that," DeRose said. "The report rightly recognizes that many Michigan communities are already taking proactive, innovative steps to achieve full funding of their retirement plans so they can keep their promises to those who have served our communities."
DeRose was one of many who served on the task force, which also included lawmakers from both sides of the aisle, municipal and insurance experts, and other key stakeholders. MERS administers benefits for more than 84% of local government retirement plans.
"The task force recommendations focus our efforts on those communities experiencing the greatest fiscal stress" DeRose said. "The task force report also calls for beginning to prefund retiree health care benefits (OPEB) for the first time and correctly acknowledges this situation was not created overnight and will not be resolved overnight. Instead, it calls on us to roll up our sleeves and craft solutions that are fiscally responsible, while preserving the retirement options our police officers, firefighters and other public servants depend on."For a summary of the Task Force recommendations, click here.
To view the full report, click here.
Update - July 17, 2017
Governor Snyder signed the teacher pension reform bill today modifying the Michigan Public Schools Employee Retirement System, known as MPSERS. For more information about the changes, you can read Public Act 92 of 2017 (previously SB 0401), or the Office of Retirement Services summary.
The act will close the current hybrid plan as of Feb. 1, 2018, and create a new hybrid plan option along with an enhanced 401(k)-style defined contribution option for new enrollees.
The new hybrid plan has the same benefit formula as the old hybrid plan, however the costs will be paid on a 50/50 cost sharing basis. In addition, the new plan includes a variable retirement age based on the plan's mortality experience, eliminates service credit purchases, and has a lower investment return assumption. A trigger was also introduced that would close the hybrid plan to new employees should the actuarial funding ratio fall below 85% for two consecutive years.
The enhanced defined contribution plan now mirrors the plan in place for state employees, with an automatic employer contribution equal to 4% of a participant's compensation plus a 100% matching contribution capped at an additional 3% of a participant's compensation.
While this legislation does not affect local governments, or the MERS system, we are committed to keeping you informed of key pension reform in Michigan.
Update - May 24, 2017
Bills were introduced in both the House and Senate yesterday that would close the Michigan Public School Employees Retirement System (MPSERS) Hybrid Plan. While this legislation does NOT affect local governments at this time, we will continue to monitor this effort closely as MERS plans could be affected in the future.
Closing all Defined Benefit and Hybrid Plans and mandating to a Defined Contribution (401(k)-style) will cost taxpayers more according to the independent Senate Fiscal Agency analysis performed last year when similar bills were introduced in Lame Duck. There would be a similar impact should such a mandate come to local governments, who already utilize various retirement plans including Defined Contribution, Defined Benefit and Hybrid Plans based on their unique workforce needs.
In fact, plans within MERS are on schedule to eliminate unfunded liabilities over a period of 23 years and over the past five years, 73% have taken additional steps to reduce their unfunded liabilities. We will continue to partner with customers to manage both their pension and OPEB liabilities, and believe legislative attention should focus on the local units experiencing the greatest fiscal stress, and not mandate a rigid cookie-cutter approach that eliminates flexibility.
MERS will continue to keep you updated on this effort. Please click here to send us your thoughts and feedback.
Update - May 17, 2017
While no formal recommendations have been made by the group at this point, the final meeting was last Monday May 8th. This has been an intense process where we feel we have added value by providing context, education and shared the many actions customers are taking to responsibly manage their unfunded liabilities. As more details become available, we are committed to keeping you updated.
One key legislative issue that we're monitoring closely is the effort to close the Michigan Public Employees Retirement System (MPSERS) hybrid plan. Last year, a similar proposal was made in Lame Duck, and the Senate Fiscal Agency estimated that such a move would result in an additional $33 billion in costs to taxpayers over 30 years; and cost $591 million in the first year alone. The entire analysis can be found here.
Some have advocated for closing all defined benefit retirement plans, including those for local governments. If such a mandatory legislative initiative were passed, MERS customers could experience similar results as the MPSERS estimates. The key cost impact related to closing all defined benefit and hybrid plans to new entrants is the effect on the plan's cash flows, which ultimately results in the asset allocation becoming more conservative. This results in lower investment income over-time, which means higher contributions in both the short and long-term. It has been estimated that this could increase employer contributions between 20 and 30 percent.
Update - April 13, 2017
An Update on the Responsible Retirement Reform Task Force
Earlier this year, Governor Rick Snyder announced the creation of the Responsible Retirement Reform Task Force and asked MERS CEO Chris DeRose to participate. The group has met several times since February and the focus of the meetings so far has been sharing information on how pension and retiree health care plans are currently being administered, and what issues should be addressed by the task force.
Thank you for your feedback, and please continue to provide it! Chris has made an effort to share your thoughts and concerns with the task force, and will continue to do so.
Key themes we have heard from you include:
1) The need to provide awareness and information to key decision makers of the actions that you have already taken to manage your unfunded accrued liability. It is clear that more education of policy makers is needed in this area.
2) One-size doesn’t fit all – each municipality has its own unique challenges and that should be taken into consideration.
3) Ensure that there aren’t unintended consequences of recommended reforms. Recruitment of qualified employees and workforce management are key areas that may be impacted by recommended changes.
To date, no recommendations have been formulated. However, it is clear that OPEB is the bigger issue and there may be a need for additional reporting and transparency. MERS will continue to keep you updated on the activities of the task force here.
Again your ongoing feedback and thoughts are critical in this process! Please click here to send us your thoughts and feedback..
For a print version of the myth vs facts sheet, click here.
Task Force Members
- David Breen, retired managing partner at PricewaterhouseCoopers
- Ben Carter, executive vice president and interim leader of East Group Operations for Trinity Health
- Rep. Tom Albert (R-Lowell)
- Rep. Andy Schor (D-Lansing)
- Sen. Jim Stamas (R-Midland)
- Sen. Rebekah Warren (D-Ann Arbor)
- Chris DeRose, Municipal Employees' Retirement System
- Judy Allen, Michigan Townships Association
- Steve Currie, Michigan Association of Counties
- Tony Minghine, Michigan Municipal League
- Mark Cook, Blue Cross and Blue Shield of Michigan
- Bob Daddow, Deputy Oakland County Executive
- Paula Zelenko, Burton Mayor, a former state House member
- Mark Dochety Michigan Professional Firefighters
- Ken Grabowski, Police Officers Association of Michigan
- Dave Hiller, Michigan Fraternal Order of Police
- Mike Sauger, Michigan Association of Police Organizations
- Nick Ciaramitaro, AFSCME
- Mary Schulz, MSU Extension Center Associate Director
- Michael VanOverbeke, Michigan Association of Public Employee Retirement Systems
- The governor's ex-officio members include state Treasurer Nick Khouri, Department of Insurance and Financial Services Director Pat McPharlin and Strategic Policy Director John Walsh.
Gov. Snyder's task force on retirement reform for local government proposes recommendations for unfunded pension and retiree health care liabilities
July 18, 2017 - The proposals are focused on addressing Michigan's mounting local pension and health care costs, ensuring retiree support, and providing more financial stability and effective delivery of local government services. Read More.
MERS honored for commitment to Retirement Readiness
April 26, 2017 - The Municipal Employees' Retirement System of Michigan (MERS) was honored for its commitment to participant education and communication at the 2017 Eddy Awards sponsored by Pensions & Investments. Read More.
Snyder creates task force to address pension reform
February 7, 2017 - Gov. Rick Snyder on Monday announced the formation of the Task Force on Responsible Retirement Reform for Local Government to address unfunded long-term liabilities for retirees and municipalities. Read More.
Snyder forms task force to handle unfunded liabilities
February 6, 2017 - Michigan Gov. Rick Snyder is setting his sights on unfunded pension and retiree health care liabilities that experts warn could cripple local governments, creating a task force to develop a "responsible retirement reform" agenda by spring. Read More.
Retiree health care, pensions focus of new Gov. Snyder task force
February 6, 2017 - Two months after lame-duck efforts to address public retiree health care costs at the local level folded, Gov. Rick Snyder has formed a task force to study the issue. Read More.
Michigan leads effort to shift workers away from pensions
February 6, 2017 - Struggling under the weight of pension and health care obligations, Michigan lawmakers appear ready to take another whack at public employee benefits — a move that reflects renewed determination to shift workers to 401(k)-style retirement systems, even if it happens in baby steps. Read More.
Local Government Employee Retiree Benefits Get Task Force
February 6, 2017 - Governor Rick Snyder on Monday named a 20-person task force, including four legislators, to head up "responsible retirement reform" and address problems with pension and health care costs facing local governments statewide. Read More.
MERS' strong 2016 investment return strengthens long-term municipal pension plans statewide
January 26, 2017 - Investment returns reached 11.10 percent for the majority of Michigan's
local government retirement plans in 2016, thanks to the... Read More.
Lame duck update: What's moving through the legislature and what's not
December 12, 2016 - It's time to see which bills are dead, which are "extremely sleepy" and which are alive in these final days of lame duck. Read More.
Public retirement cuts would hit hard in Lansing
December 5, 2016 - ...lines, from making Michigan a right-to-work state to taxing pension income to asking state employees to pay more to maintain full pension benefits. Read More.
Senator David Knezek testifies on Pension Reform (video)
November 30, 2016 - "The question that we're not asking ourselves is, 'What type of a retirement, what type of livelihood do we want to provide for Michigan workers?' We may be able to get our unfunded liabilities down to zero if we ask our retirees to live in poverty; if we ask our retirees to work until they're dead. That's not something that I want on my conscience." I am, and will remain, opposed to any effort to eliminate pensions for Michigan school employees. Read More.
Michigan municipal retirees could see decreased health benefits under new bills
December 1, 2016 - Rumors of health care changes for municipal retirees swirled into the realm of legislation on Wednesday with the introduction of a dozen house bills on the subject. Read More.
Michigan Senate panel votes to close school pensions to new members
November 30, 2016 - The Republican-controlled Senate Appropriations Committee voted 9-8 Wednesday to close the school retirement system to new members, despite expert testimony from the administration of Gov. Rick Snyder and others that the move will cost billions. Read more.
Snyder officials: Teacher pension plan to cost billions
November 30, 2016 - The Senate has put off a vote on a controversial bill that would switch new teachers to a 401(k)-style retirement plan that is estimated to cost billions to Michigan tax payers. Read more.
Ciaramitaro: Closing the pension system would be a disaster
November 21, 2016 – We keep hearing that traditional pensions are "unsustainable" and in crisis. While it is true that many public pensions around the nation are still recovering from the Great Recession, the fact is that most are seeing their bottom lines improve and many are doing quite well. Read More.
Poleski Hoping For Municipal Retirement Reforms Next Month
November 21, 2016 – However, he said MML is interested in having a conversation about municipal finance and would like to have a seat at the table. When asked if a proper conversation could happen during lame duck, he said: "That is a very short window of time." Read More.
Are Local Government Retirement Reforms On The Horizon?
November 1, 2016 – …because it's a "complicated, complex issue," Mausolf said, "time and care should be taken to ensure that there isn't any unintended consequences for our public workers."Read more.
Talk Rife Of Senate Moving New School Employees To 401k
October 28, 2016 – The hybrid portion is 100 percent funded," Ms. Vanden Bosch said. "Nothing you do to new employees can reduce that legacy liability. Read more.
Leelanau County budget approved
October 19, 2016 – Leelanau officials happy with proposed budget... Read more.
County board approves 2017 spending plan
October 20, 2016 – In addition, retiree health care obligations are "trending positive with lower budgeted costs," Read more.
MERS submits op-ed to Crain's
October 20, 2016 – MERS CEO, Chris DeRose submits and op-ed to Crain's on the municipal retirement landscape in Michigan. Read more.
MERS submits op-ed to the Lansing State Journal
October 13, 2016 – MERS CEO, Chris DeRose submits an Op-Ed to the Lansing State Journal to add additional context to articles written on unfunded pension liabilities. Read more.
Study Finds Pension, OPEB Costs Manageable for Most Governments
October 5, 2016 – A recent study from the Center for Retirement Research at Boston College indicates liabilities for most governments are manageable. Read more.
MERS submits letter to Traverse City Record Eagle editor
October 3, 2016 – MERS CEO, Chris DeRose submits a letter to the Traverse City Record Eagle responding to an editorial: "Unfunded pensions could cripple the state." Read more.
Petoskey News: Pension positions: Where area governments stand with retirement liabilities
August 3, 2016 – MERS, in our opinion, do a good job of keeping track of where you are and making recommendations," said Tom Cannon, city administrator in East Jordan. Read more.
Saginaw shifting $72 million city-managed police pension fund to MERS
May 12, 2016 – "They have demonstrated a better return on investments and lower management fees," Jordan said. "In addition to that, the administrative costs that we are doing in-house, we'd be outsourcing that. So there would be an internal saving with that." Read more.