Bonds for Retirement Liabilities

by Dickinson Wright
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The Michigan Legislature recently enacted, and Governor Snyder signed into law on October 9, 2012, amendments to the Revised Municipal Finance Act (2001 PA 34 or "Act 34") that permit, through December 31, 2014, a city, village, township or county (each a "local unit") to issue a municipal security (which includes bonds or other evidences of indebtedness) to pay all or part of the costs of the unfunded accrued liability of certain retirement programs administered by the local unit. The amendments are set forth in 2012 PA 329 or "Act 329."

Authorized Purposes for Borrowing

Unfunded Pension Liabilities

Act 329 authorizes a local unit, (a) in connection with the partial or complete cessation of accruals to a defined benefit plan or the closure of the defined benefit plan to new or existing employees, and the implementation of a defined contribution plan, or (b) to fund costs of a local unit that has already ceased accruals to a defined benefit plan, to issue bonds without a vote of the local unit’s electors to pay all or part of the cost of the "unfunded pension liability" (defined as the amount a defined benefit plan’s liabilities exceeds its assets according to the most recent applicable standards of the Government Accounting Standards Board (GASB)) for such defined benefit plan. The local unit may not levy taxes beyond the limit authorized by law to pay the principal of and interest on such bonds.

Act 329 provides that a local unit issuing bonds to pay all or part of the cost of its unfunded pension liability may not change the benefit structure of its defined benefit plan if the plan is undergoing the partial cessation of accruals, although the local unit my reduce benefits of the defined benefit plan for years of service that accrue after the issuance of the bonds. In addition, the local unit must covenant with the holders of the bonds and the State of Michigan that following the issuance of the bonds, it will not rescind whatever action it has taken to make a partial or complete cessation of accruals to a defined benefit plan or the closure of the plan for new or existing employees.

Unfunded Accrued Health Care Liabilities

Act 329 also authorizes a local unit, without a vote of its electors, to issue bonds to pay the costs of the "unfunded accrued health care liability" (defined as the difference between the assets and liabilities of a health care trust fund (as described below) as determined by an actuarial study according to the most recent GASB applicable standards). A health care trust fund is a trust or fund created by a local unit and used exclusively to provide funding for postemployment health care benefits for public employee retirees of a local unit, and includes the retirement health care fund vehicle administered by the Municipal Employees Retirement System (MERS) established pursuant to the Municipal Employees Retirement Act of 1984. As in the case with bonds issued to fund all or part of the cost of a local unit’s unfunded pension liabilities, the local unit may not levy taxes beyond the limit authorized by law to pay debt service on bonds issued to pay the costs of a local unit’s unfunded accrued health care liabilities. Act 329 provides that the funding of post employment health care benefits as provided therein shall not constitute a contract to pay such benefits.

The proceeds of bonds issued to fund the costs of a local unit’s unfunded accrued health care liability are required to be deposited in a health care trust fund, a trust created by the local unit which has as its beneficiary a health care trust fund, or a restricted fund within a trust that would only be used to retire the bonds.

The following requirements must be met for all bonds issued under Act 329:
  • The local unit must publish a notice of intent to issue bonds, advising the electors of the local unit of the maximum principal amount of the bonds to be issued, the purpose of the bond issue, the source of payment and the right of referendum on the issuance of the bonds. The publication of the notice starts a 45-day referendum period on the bonds.
  • Prior to the issuance of the bonds, the local unit must prepare and make available to the public a comprehensive financial plan that includes all of the following:
    • An analysis of the current and future obligations of the local unit with respect to each retirement program and each postemployment health care benefit program
    • Evidence that the issuance of the bonds, together with other lawfully available funds, will be sufficient to eliminate the unfunded pension liability or unfunded accrued health care liability
    • A debt service amortization schedule and a description of the actions required to satisfy the schedule
    • A certification by the person preparing the plan that it is accurate and completed
  • If the proceeds of the bonds are to be deposited in a health care trust fund, a plan of the local unit to mitigate the increase in health care costsThe bonds must be approved by the Michigan Department of Treasury.
  • The local unit issuing the bonds must be assigned a credit rating within the category of AA or higher or the equivalent by a least one nationally recognized rating agency.

FOR MORE INFORMATION CONTACT:

Terry Donnelly, is a member in Dickinson Wright’s Troy office. He can be reached at 248.433.7224 or tdonnelly@dickinsonwright.com.

Kester So, is a member in Dickinson Wright’s Lansing office. He can be reached at 517.487.4722 or kso@dickinsonwright.com.

Richard Wendt, is a member in Dickinson Wright’s Grand Rapids office. He can be reached at 616.336.1013 or rwendt@dickinsonwright.com.

Paul Wyzgoski, is a member in Dickinson Wright’s Troy office. He can be reached at 248.433.7255 or pwyzgoski@dickinsonwright.com.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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