Local governments around the country, including in Michigan, are finding it challenging to fund current services due to ever-increasing pension and retiree health care costs. However, many Michigan local governments might have a useful tool at their disposal and not even realize it. Not only does it give local governments an alternative funding source to put toward retiree benefits, but it also increases financial transparency.

With recent changes to the law, it is easier to see local units’ pension and retiree health care liabilities. Under the recently passed PA 202 of 2017, the Protecting Local Government Retirement and Benefits Act, local units are required to submit summaries on the status of retirement benefits. Based on those reports, Michigan Department of Treasury must determine the underfunded status of every local unit. Treasury released the Local Unit Retirement System Summary list of local units with underfunded pensions or retiree health care funds. The list consists of local units with a fiscal year ending on June 30, 2017. Other local units have fiscal years ending Sept. 31 or Dec. 30. Once those local units report in, Treasury will release additional lists.

Two indicators are used to determine underfunded status:

1. Funded ratio
2. Annual required contribution (ARC) divided by governmental revenue

For retiree health care, if the funded ratio is below 40 percent and the ARC is greater than 12 percent of the local unit’s annual general fund operating revenues, then the local unit will be deemed underfunded.

For pension systems, if the funded ratio is below 60 percent and the ARC is greater than 10 percent of the local unit’s annual general fund operating revenues, then the local unit will be deemed underfunded. A local unit will only be determined as underfunded when it has both triggers. For example, a local unit will not be underfunded if, for the health system, the funded ratio is 30 percent, but the ARC divided by governmental revenue equals 5 percent.

Act 345 of 1937, the Fire Fighters and Police Officers Retirement Act, allows for a retirement plan for police officers and firefighters and also authorizes a funding source. Act 345 is a tool local governments can use to fund retirement costs. To date, 48 local governments have adopted an Act 345 pension system and, under the PA 202 trigger system, only 7 of the 48 Act 345 pension systems were deemed underfunded by Treasury.

Local governments with Act 345 pension systems have already done the hardest part—enacting it. Act 345 pensions must receive a majority vote from the residents of the local government. However, once such a fund is approved, Act 345 authorizes the creation of an Act 345 millage and thus a new funding source to fund police and firefighter pensions. This Act 345 millage has no ceiling and is not restricted by the Headlee Amendment.

Every entity with an Act 345 pension system triggered by PA 202 is levying an Act 345 millage, thereby utilizing Act 345 to help fund their police or firefighter pension system. In light of Treasury’s release of entities triggered by PA 202, it may be beneficial for these entities to look at and evaluate whether they are benefiting as much as possible from Act 345.

For any other entities triggered by PA 202, Act 345 is a good tool to keep police and fire pensions funded as the Act allows the entity to create a new funding source for those pensions. By creating a new revenue stream specifically for police and fire pensions, less money has to be diverted from the operating budget. More information regarding Act 345 of 1937, the Firefighter and Police Officer Retirement Act, can be found on the Michigan State University Extension website. The brief includes information on how to establish an Act 345 pension as well as the pros and cons of Act 345.