EXPAND ALLOWABLE USE OF CERTAIN

MUNICIPAL RETIREMENT SECURITIES

House Bill 5279 (Substitute H-1)

Sponsor: Rep. Ben Glardon

House Committee: Financial Liability Reform

Complete to 11-12-14

A SUMMARY OF HOUSE BILL 5279 (H-1)

The bill would amend Section 518 of the Revised Municipal Finance Act to expand the conditions under which a county, city, village, or township may issue a municipal security, subject to certain requirements, to pay all or a part of the costs of the unfunded accrued liability (UAL) when closing a defined benefit (DB) pension plan and implementing a defined contribution (DC) plan, or to pay the costs of a retiree health care UAL. (The term "local unit" is used in the document to refer to a county, city, village, or township.)

Currently statute allows for a local unit to issue a security under this section until December 31, 2015, if the municipality has a credit rating of AA or higher from at least one nationally recognized credit rating agency.

House Bill 5279 (H-1) would expand the ability to issue a security under this section to a local unit that has a credit rating of A or higher from at least one nationally recognized credit rating agency if that municipal security is insured at the time of issuance.

BACKGROUND INFORMATION:

Section 518 (MCL 141.2518) was added to the Revised Municipal Finance Act by Public Act 329 of 2012 (Senate Bill 1129). It allowed a local unit to issue securities to pay for the UAL costs when transitioning from a DB plan to a DC plan or to pay for a retiree health care UAL until December 31, 2014. Only local units with a credit rating of AA or higher from at least one nationally recognized credit rating agency are eligible. Thus far, five local units have issued securities under Section 518.

Public Act 297 of 2014 (Senate Bill 922) recently amended Section 518 to extend the sunset until December 31, 2015.

The ability to issue securities authorized under this section is subject to the following provisions:

                    The amount of taxes necessary to pay for the security along with other taxes may not exceed the limit authorized by law.

                    A local unit issuing a security must publish a notice of intent, make a comprehensive financial plan containing specified information available to the public, and obtain approval from the Department of Treasury.

                    Borrowing proceeds may be used to pay the costs of the issuance of the security. Borrowing proceeds for a UAL health care must be deposited in a health care trust fund.

                    A local unit issuing a security may not change the benefit structure of a DB plan if the plan is being partially closed, except that it could reduce benefits for future years of service.

                    A local unit issuing a security must covenant with the security holders and the State of Michigan that it will not rescind the action taken to partially or completely close its DB plan.

 

FISCAL IMPACT:

To the extent eligible counties, cities, villages, or townships opt to issue securities to pay off the UAL, those local units would incur fixed debt obligations as opposed to retirement system contributions for UAL costs, which increase or decrease as investment returns and other factors built into actuarial assumptions fluctuate over time. (New UAL costs could arise over time, beyond those for which the local unit initially borrows.) Generally, securities issued for this purpose are not exempt from federal taxation since the purpose of the borrowing is to take advantage of borrowing rates that are lower than assumed rates of returns for DB system investments. The amount of any savings (or costs) to local units borrowing under the bill's provisions would depend on the interest rate at which they could borrow funds and the cost of insuring the security relative to future retirement system investment returns. The lower the credit rating of the local unit, the higher the cost is likely to be.

The bill would create an indeterminate amount of administrative costs for the Department of Treasury to review and approve the issuance of securities allowed under its provisions potentially for a much greater number of local units. Based on July 2014 data from the Department of Treasury for those local units that use Standard & Poor's as their credit rating agency, moving from AA to A ratings would more than double the number of eligible local units and would allow for all but approximately 5% of local units with a credit rating to qualify.

Fiscal Analysts: Bethany Wicksall

Kyle I. Jen

This analysis was prepared by nonpartisan House staff for use by House members in their deliberations, and does not constitute an official statement of legislative intent.