The city’s retiree health insurance and supplemental pension liability is estimated at $38.5 million. At this time, the city has only about $500,000 set aside for future payments. The supplemental pension portion of the obligation is calculated at $11.3 million, which must be 60% funded by 2043, Stanchina said. “Unfortunately, the ‘pension’ designation changes the funding requirement from 40% in 30 years to 60% in 20 years,” Stanchina explained in a memo to the council. “This change greatly increases the amount of money that will be needed on annual basis.” To meet the new threshold, an annual contribution of $239,000 to the trust fund is proposed. While there is no specific fine or penalty for disregarding the state law, city officials believe it’s important to stay in compliance.
With an anticipated 7% rate of return, the fund was projected to grow to $14 million by 2049, sufficient to meet the state’s guidelines to reach a pre-funded level of 40%. The Protecting Local Government Retirement and Benefits Act of 2017 sets guidelines to identify pensions and retirement health plans that are underfunded. To comply, the city adopted a plan to contribute $139,000 annually to a trust fund for 30 years, beginning in 2019.
The original plan, however, included not only retirees receiving health insurance but also those receiving payment for opting out, City Manager Jordan Stanchina said. In the past year, it was determined the unfunded amount for those opting out must be reclassified as a supplemental pension. The fund was set up two years ago as part of the city’s corrective action plan for underfunded retirement benefits. Although there has been no increase in the overall liability, the adjustment is needed because of a reclassification of the city’s obligation under state law.
In other action at its Sept. 7 meeting, the council: — Scheduled a public hearing for 6 p.m. Sept. 20 for the grant-aided purchase of a new squad car. It’s anticipated the city would be responsible for the first $26,663 and a U.S. Department of Agriculture Rural Development grant would reimburse the next $14,300. The city began phasing out retiree health benefits for new employees in 2009. With that adjustment, among others, the unfunded liability may change in future actuarial studies. For now, however, the city must target the $38.5 million figure.
The city has mostly operated on a pay-as-you-go basis to fund retiree health benefits. They are budgeted at $1.44 million in the current fiscal year, which compares with total general fund spending of $7.3 million. The new corrective action plan will be submitted to the Municipal Stability Board for approval. The board, comprised of three members appointed by the governor, is housed within the Michigan Department of Treasury.
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