Public Act 202 of 2017 requires governments to prepare additional reporting for pension and other post-employment benefits (OPEB) plans using Form 5572. By this time, every government that has had this reporting requirement has filed this form, and the potential waivers or corrective action plans to address underfunded status.
- For primary governments, underfunded status for a pension plan is defined as having plan assets that are not at least 60 percent of the total liability, and the actuarially determined contribution is greater than 10 percent of total governmental fund revenues.
- For primary governments, underfunded status for an OPEB plan is defined as having plan assets that are not at least 40 percent of the total liability, and the actuarially determined contribution is greater than 12 percent of total governmental fund revenues.
The Michigan Department of Treasury (Treasury) issued a memo on September 25, 2018, regarding the application of uniform assumptions. For reporting on Form 5572, Treasury requires uniform assumptions to be included for fiscal years ending 2019, if the audited financial statements were based on an actuarial valuation issued after December 31, 2018. In all other cases, reporting of pension and OPEB liabilities under the uniform assumptions is required for fiscal years ending no later than 2020. Refer to the full memo found on the State of Michigan’s website.
Treasury will use the uniform assumptions to increase comparability of pension and OPEB plans from one municipality to the next. Treasury recommends that all actuarial valuations issued after December 31, 2018, include the provisions of the uniform assumptions. It is important to consider whether using the uniform assumptions for the measurement of your municipality’s pension or OPEB liabilities are appropriate under GAAP, or whether the liabilities should be calculated using two sets of assumptions. If using two sets of assumptions is appropriate, both amounts will be reported to Treasury on Form 5572. If your municipality uses two sets of assumptions, the calculated liabilities may vary greatly.
The uniform assumptions were developed by Treasury with the help of an independent actuary firm as well as numerous stakeholders that represented local governments, employees and retirees, actuaries, and accounting professionals. The uniform assumptions are not radically different than what most local governments are currently using in their assumptions to calculate pension and OPEB liabilities; however, the assumptions can vary greatly from one government to another based on the individual government’s experience.
Treasury has issued the following uniform assumptions for fiscal year 2019:
|Investment Rate of Return||
Maximum of 7.00%
Blended discount rate calculated using GASB Statements No. 68 and No. 75 methodology. For periods in which projected plan assets are Sufficient to make Projected Benefit Payments: Maximum of 7.00%
For periods in which projected plan assets are Not Sufficient to make Projected Benefit Payments: 3.00%
A minimum of 3.50% or based on an actuarial experience study conducted within the last five years.
A version of the RP-2014 Mortality Table or based on an actuarial experience study conducted within the last five years.
|Healthcare Inflation (for Medical and Drug)||
Non-Medicare: Initial rate of 8.50% decreasing .25% per year to a 4.50% long-term rate Medicare: Initial rate of 7.00% decreasing .25% per year to a 4.50% long-term rate
|Amortization of the Unfunded Actuarial Accrued Liability||
Local units must amortize the Unfunded Actuarial Accrued Liability (UAAL) over a maximum closed period of:
Closed plans must use a level dollar amortization method.
Open plans may use a level dollar or percent of pay amortization method.
The CPAs at Yeo & Yeo recommend that municipalities work with their actuaries to ensure compliance with Public Act 202 of 2017 and make certain that appropriate assumptions are applied when developing pension and OPEB liabilities.