HB-6378, As Passed House, December 19, 2018

HB-6378, As Passed Senate, December 13, 2018

SENATE SUBSTITUTE FOR

HOUSE BILL NO. 6378

A bill to amend 1980 PA 300, entitled

"The public school employees retirement act of 1979,"

by amending sections 41, 42, and 42a (MCL 38.1341, 38.1342, and

38.1342a), section 41 as amended by 2018 PA 181, section 42 as

amended by 2017 PA 92, and section 42a as added by 2018 PA 328, and

by adding sections 43h and 43i.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

Sec. 41. (1) The annual level percentage of payroll

contribution rates to finance benefits being provided and to be

provided by the retirement system must be determined by actuarial

valuation under subsection (2) on the basis of the risk assumptions

that the retirement board and the department adopt after

consultation with the state treasurer and an actuary. An annual

actuarial valuation must be made of the retirement system to

determine the actuarial condition of the retirement system and the

required contribution to the retirement system. An annual actuarial

gain-loss experience study of the retirement system must be made to

determine the financial effect of variations of actual retirement

system experience from projected experience.

(2) Except as otherwise provided in sections 41a and 41b, the

annual contribution rates for benefits are subject to all of the

following:

(a) Except as otherwise provided in this subdivision, the

contribution rate for benefits must be computed using an individual

projected benefit entry age normal cost method of valuation. If the

contributions described in section 43e are determined by a final

order of a court of competent jurisdiction for which all rights of

appeal have been exhausted to be unconstitutional and the

contributions are not deposited into the appropriate funding

account referenced in section 43e, the contribution rate for health

benefits provided under section 91 must be computed using a cash

disbursement method.

(b) Subject to subdivision (c), the contribution rate for

service likely to be rendered in the current year, the normal cost

contribution rate, for reporting units must be determined as

follows:

(i) Calculate the aggregate amount of individual projected

benefit entry age normal costs.

(ii) Divide the result of the calculation under subparagraph

(i) by 1% of the aggregate amount of active members' valuation

compensation.

contribution rates for members under section 41b(2), beginning with

the state fiscal year ending September 30, 2018 and for each

subsequent fiscal year, the normal cost contribution rate must not

be less than the normal cost contribution rate in the immediately

preceding state fiscal year.

(d) Subject to subdivision (e), the contribution rate for

unfunded service rendered before the valuation date, the unfunded

actuarial accrued liability contribution rate, must be determined

as follows:

(i) Calculate the aggregate amount of unfunded actuarial

accrued liabilities of reporting units as follows:

(A) Calculate the actuarial present value of benefits for

members attributable to reporting units.

(B) Calculate the actuarial present value of future normal

cost contributions of reporting units.

valuation date.

(D) Add the results of sub-subparagraphs (B) and (C).

(E) Subtract from the result of the calculation under sub-

subparagraph (A) the result from the calculation under sub-

subparagraph (D).

(ii) Subject to subsection (18), divide the result of the

calculation under subparagraph (i) by 1% of the actuarial present

value over a period not to exceed 50 years of projected valuation

compensation.

(e) Except for the employee portion of the unfunded actuarial

accrued liability contribution rates for members under section

41b(2), beginning with the state fiscal year ending September 30,

2018 and for each subsequent fiscal year until the state fiscal

year ending September 30, 2021, the unfunded actuarial accrued

liability contribution rate must not be less than the unfunded

actuarial accrued liability contribution rate in the immediately

preceding state fiscal year. Beginning with the state fiscal year

ending September 30, 2022, and for each subsequent fiscal year

until the unfunded actuarial accrued liability is paid off, the

unfunded actuarial accrued liability contribution sum due and

payable must not be less than the unfunded actuarial accrued

liability contribution sum due and payable in the immediately

preceding state fiscal year.

(f) Beginning with the state fiscal year ending September 30,

2013 and for each subsequent fiscal year, the unfunded actuarial

accrued liability contribution rate applied to payroll must not

exceed 20.96% for a reporting unit that is not a university

reporting unit. Any additional unfunded actuarial accrued liability

contributions as determined under this section for each fiscal year

are to be paid by appropriation from the state school aid fund

established by section 11 of article IX of the state constitution

of 1963. Except as otherwise provided in this section ~~, section~~ and

sections 41a , and ~~section~~ 41b, the unfunded actuarial accrued

liability contribution rate must be based on and applied to the

combined payrolls of the employees who are members or qualified

participants, or both.

~~(g) Beginning with the state fiscal year ending September 30,~~

~~2020 and for each subsequent fiscal year, for a reporting unit that~~

~~is not a university reporting unit, tax supported community or~~

~~junior college, public school academy, or district library as that~~

~~term is defined in section 69g, the unfunded actuarial accrued~~

~~liability contribution rate determined under subdivision (d) must~~

~~be applied to the reporting unit's payroll, as adjusted under~~

~~subdivision (h).~~

~~(h) Beginning with the state fiscal year ending September 30,~~

~~2020, the payroll for which the unfunded actuarial accrued~~

~~liability contribution rate is applied for a reporting unit~~

~~described in subdivision (g) must be adjusted by the growth rate of~~

~~the reporting unit's payroll plus purchased services in the~~

~~previous fiscal years based on methods as determined by the~~

~~retirement system and in consultation with the system's actuary.~~

~~The adjusted payroll under this subdivision must become the basis~~

~~on which the contribution rate provided under subdivision (d) for~~

~~each subsequent state fiscal year is determined for a reporting~~

~~unit described in subdivision (g).~~

(g) ~~(i)~~ Beginning with the state fiscal year ending September

30, 2016 and for each subsequent state fiscal year, the unfunded

actuarial accrued liability contribution rate applied to the

combined payroll, as provided in section 41a, must not exceed

25.73% for a university reporting unit. Any additional unfunded

actuarial accrued liability contributions as determined under this

section for each fiscal year for university reporting units are to

be paid by appropriation under article III of the state school aid

act of 1979, 1979 PA 94, MCL 388.1836 to 388.1891.

(3) Before November 1 of each year, the executive secretary of

the retirement board shall certify to the director of the

department the aggregate compensation estimated to be paid public

school employees for the current state fiscal year.

(4) On the basis of the estimate under subsection (3), the

annual actuarial valuation, and any adjustment required under

subsection (6), the director of the department shall compute the

sum due and payable to the retirement system and shall certify this

amount to the reporting units.

(5) Except as provided in section 41b, the reporting units

shall pay the amount certified under subsection (4) to the director

of the department in equal payroll cycle installments for unfunded

actuarial accrued liability contributions and payroll cycle

installments for normal cost contributions.

(6) Not later than 90 days after termination of each state

fiscal year, the executive secretary of the retirement board shall

certify to the director of the department and each reporting unit

the actual aggregate compensation paid to public school employees

during the preceding state fiscal year. On receipt of that

certification, the director of the department may compute any

adjustment required to the amount because of a difference between

the estimated and the actual aggregate compensation and the

estimated and the actual actuarial employer contribution rate. The

difference, if any, must be paid as provided in subsection (9).

This subsection does not apply in a fiscal year in which a deposit

occurs under subsection (14).

(7) The director of the department may require evidence of

correctness and may conduct an audit of the aggregate compensation

that the director of the department considers necessary to

establish its correctness.

(8) A reporting unit shall forward employee and employer

Social Security contributions and reports as required by the

federal old-age, survivors, disability, and hospital insurance

provisions of title II of the social security act, 42 USC 401 to

434.

(9) For an employer of an employee of a local public school

district or an intermediate school district, for differences

occurring in fiscal years beginning on or after October 1, 1993, a

minimum of 20% of the difference between the estimated and the

actual aggregate compensation and the estimated and the actual

actuarial employer contribution rate described in subsection (6),

if any, must be paid by that employer in the next succeeding state

fiscal year and a minimum of 25% of the remaining difference must

be paid by that employer in each of the following 4 state fiscal

years, or until 100% of the remaining difference is submitted,

whichever first occurs. For an employer of other public school

employees, for differences occurring in fiscal years beginning on

or after October 1, 1991, a minimum of 20% of the difference

between the estimated and the actual aggregate compensation and the

estimated and the actual actuarial employer contribution rate

described in subsection (6), if any, must be paid by that employer

in the next succeeding state fiscal year and a minimum of 25% of

the remaining difference must be paid by that employer in each of

the following 4 state fiscal years, or until 100% of the remaining

difference is submitted, whichever first occurs. In addition,

interest must be included for each year that a portion of the

remaining difference is carried forward. The interest rate must

equal the actuarially assumed rate of investment return for the

state fiscal year in which payment is made. This subsection does

not apply in a fiscal year in which a deposit occurs under

subsection (14).

(10) Beginning on September 30, 2006, all assets held by the

retirement system must be reassigned their fair market value, as

determined by the state treasurer, as of September 30, 2006, and in

calculating any unfunded actuarial accrued liabilities, any market

gains or losses incurred before September 30, 2006 may not be

considered by the retirement system's actuaries.

(11) Except as otherwise provided in this subsection,

beginning on September 30, 2006, the actuary used by the retirement

board shall assume a rate of return on investments of 8% per annum,

as of September 30, 2006, which rate may only be changed with the

approval of the retirement board and the director of the

department. Beginning on July 1, 2010, the actuary used by the

retirement board shall assume a rate of return on investments of 7%

per annum for investments associated with members who first became

members after June 30, 2010, and before February 1, 2018, which

rate may only be changed with the approval of the retirement board

and the director of the department. Beginning on February 1, 2018,

the actuary used by the retirement board shall assume a rate of

return on investments of 6% per annum for investments associated

with members who first became a member on or after February 1,

2018, which rate may only be changed with the approval of the

retirement board and the director of the department.

(12) Beginning on September 30, 2006, the value of assets used

must be based on a method that spreads over a 5-year period the

difference between actual and expected return occurring in each

year after September 30, 2006, and the methodology may only be

changed with the approval of the retirement board and the director

of the department.

(13) Beginning on September 30, 2006, the actuary used by the

retirement board shall use a salary increase assumption that

projects annual salary increases of 4%. In addition to the 4%, the

retirement board shall use an additional percentage based on an

age-related scale to reflect merit, longevity, and promotional

salary increase. The actuary shall use this assumption until a

change in the assumption is approved in writing by the retirement

board and the director of the department.

(14) For fiscal years that begin on or after October 1, 2001,

if the actuarial valuation prepared under this section demonstrates

that as of the beginning of a fiscal year, and after all credits

and transfers required by this act for the previous fiscal year

have been made, the sum of the actuarial value of assets and the

actuarial present value of future normal cost contributions exceeds

the actuarial present value of benefits, the amount based on the

annual level percent of payroll contribution rate under subsections

(1) and (2) may be deposited into the health advance funding

subaccount created by section 34.

(15) Notwithstanding any other provision of this act, if the

retirement board establishes an arrangement and fund as described

in section 6 of the public employee retirement benefit protection

act, 2002 PA 100, MCL 38.1686, the benefits that are required to be

paid from that fund must be paid from a portion of the employer

contributions described in this section or other eligible funds.

The retirement board shall determine the amount of the employer

contributions or other eligible funds that must be allocated to

that fund and deposit that amount in that fund before it deposits

any remaining employer contributions or other eligible funds in the

pension fund.

(16) The retirement board and the department shall conduct and

review an experience investigation study and adopt risk assumptions

on which actuarial valuations are to be based after consultation

with the actuary and the state treasurer. The experience

investigation study must be completed and risk assumptions must be

periodically reviewed at least once every 5 years.

(17) Every April 1 following the periodic review of risk

assumptions under subsection (16), the office of retirement

services on behalf of the department and the state treasurer shall

collaborate to submit a report to the senate majority leader, the

speaker of the house of representatives, the senate and house of

representatives appropriations committees, and the senate and house

fiscal agencies. A report required under this subsection must be

published on the office of retirement services's website and

include at least all of the following:

(a) Forecasted rate of return on investments at all of the

following probability levels:

(i) 5%.

(ii) 25%.

(iii) 50%.

(iv) 75%.

(v) 95%.

(b) The actual rate of return on investments for 10-, 15-, and

20-year intervals.

(d) Retirement age assumptions.

(e) Payroll growth assumptions.

(f) Any other assumptions that have a material impact on the

financial status of the retirement system.

(18) Except as otherwise provided in this subsection, for

members who first became members before February 1, 2018, beginning

with the state fiscal year ending September 30, 2022 and for each

subsequent state fiscal year until the pension and retiree health

care payroll growth assumption rate for a reporting unit that is

not a university reporting unit is zero, the payroll growth

assumption rate for a reporting unit that is not a university

reporting unit must be reduced by 50 basis points. Beginning with

the state fiscal year ending September 30, 2025 and for each

subsequent state fiscal year until the rate described in this

subsection is zero, if the pension and retiree health care unfunded

actuarial accrued liability contribution sum directly attributable

to the 50 basis points reduction under this subsection for the

current fiscal year is 7% or more of the pension and retiree health

care unfunded actuarial accrued liability contribution sum in the

immediately preceding state fiscal year, the office of retirement

services may reduce the rate described in this subsection by 25

basis points in that current fiscal year instead of the 50 basis

point reduction described in this subsection. Beginning with the

fiscal year ending September 30, 2022 and for each subsequent state

fiscal year until the rate described in this subsection is zero,

the office of retirement services and the retirement board may

agree to reduce the rate described in this subsection by any number

of additional basis points.

(19) As used in this section, :

~~(a) "Payroll plus purchased services" includes functions 1xx,~~

~~2xx, and 45x, and object codes 1xxx, 31xx, 33xx, and 41xx, as~~

~~defined in the most recent "Michigan Public School Accounting~~

~~Manual Bulletin 1022" as of July 13, 2017, and is equal to the~~

~~total of salaries, professional and technical services,~~

~~client/pupil transportation, and repairs and maintenance services~~

~~expenditures, including the charges incurred in the general,~~

~~special education, and vocational education funds for the benefit~~

~~of the current fiscal year, whether paid or unpaid.~~

~~(b) "University~~ "university reporting unit" means a reporting

unit that is a university listed in the definition of public school

employee under section 6.

Sec. 42. (1) Beginning with the state fiscal year ending

September 30, 1995 and subject to section 41b, a reporting unit

shall contribute the entire amount determined under section 41 to

the reserve for employer contributions and to the reserve for

health benefits. The reporting unit contribution under this

subsection is the exclusive obligation of the reporting unit

payable out of general budget resources of the reporting unit,

including funds available under local millage and other local

resources and from the state school aid allocation to the reporting

unit, and is not a separate obligation by specific reimbursement or

otherwise of this state.

(2) As authorized by resolution or other enabling act of its

governing body, the employer shall pick up all contributions of a

member made under section 43a for all compensation paid after

December 31, 1986 and reported to the retirement system. Although

considered contributions of a member for certain purposes under

this act, all contributions picked up must be treated as paid by

the employer in lieu of contributions by the employee.

Contributions picked up as provided in this subsection must be paid

from the same source of funds that is used for paying compensation

to the member. The employer may pick up these contributions by

either a reduction to the member's cash salary, an offset against a

future salary increase, or a combination of a reduction in salary

and offset against a future salary increase. This subsection does

not apply, and the employer shall not deduct, offset, or remit

contributions, until the department receives notification from the

United States Internal Revenue Service that contributions picked up

will not be included as gross income of the member until they are

distributed or made available to the member, retirant, retirement

allowance beneficiary, or refund beneficiary.

(3) The employer shall deduct from a member's compensation the

contributions for ~~social security~~ Social Security provided in 1951

PA 205, MCL 38.851 to 38.871. Contributions must be made while the

member remains a public school employee. Each reporting unit

official shall deduct the ~~social security~~ Social Security

contributions from the compensation of each member for each payroll

period after the date the employee becomes a member. Social

~~security~~ Security contributions must be made notwithstanding that

the minimum compensation provided by law is changed. Each member is

considered to have agreed to the contributions prescribed in this

subsection.

(4) Each reporting unit official shall forward member

contributions to the retirement system on a schedule and in a

manner determined by the retirement system.

(5) Each reporting unit official shall forward the entire

employer contribution required by this act to the retirement system

on a schedule and in a manner determined by the retirement system.

(6) Each reporting unit official shall submit to the

retirement system a report that includes the information for

retirement purposes, including, but not limited to, persons

employed, retirants performing services at a reporting unit who are

employed by an entity other than the reporting unit or who are

independent contractors, wages or amounts paid, hours, and

contributions required under this act. The report must include the

information on a pay period basis and must be submitted to the

retirement system on a schedule and in a manner determined by the

retirement system. The superintendent for a reporting unit or the

chief administrator for a reporting unit that does not have a

superintendent shall complete an annual certification that gives

authorization for the employees of the reporting unit to report the

information to the retirement system.

(7) If a reporting unit fails to submit a report or

contributions, or both, according to the schedule established by

the retirement board, the reporting unit shall pay a late fee. If

the remittance of contributions is late, the late fee must include

interest for each day that the remittance of contributions is late.

The retirement board periodically may establish the late fee, which

must not be less than $25.00, and interest charges, which must not

be less than 6% per annum.

(8) If Subject to subsection (9), if a reporting unit fails to

correct errors on a report before the errors are discovered by the

retirement system or if the errors are intentional, the reporting

unit shall pay the late fee and interest charges as described in

~~this~~ subsection (7) for each day that the report is in error,

unless reasonable cause is shown to the satisfaction of the

retirement system.

(9) If the retirement board determines that a reporting unit

has committed an intentional error or omission that includes a

failure to submit contributions required by this act, the total

assessment of daily late fees and daily interest charges under

subsection (8) must not exceed the reporting unit's delinquent

contribution balance associated with the error or omission, or the

reporting unit's employer contribution balance for the previous

school fiscal year, whichever is less. Subject to subsection (11),

if the retirement board determines that a reporting unit has

committed an intentional error or omission that does not include a

failure to submit contributions required by this act, the total

assessment of daily late fees and daily interest charges under

subsection (8) must not exceed 100% of the reporting unit's

employer contributions for the previous school fiscal year.

(10) ~~(8)~~ On written notice from the retirement board, the

superintendent of public instruction and the state treasurer shall

withhold payment of state funds, in part or in whole, payable from

the state school aid appropriation or higher education

appropriations to a reporting unit that fails to comply with this

section.

(11) Errors or omissions relating to the reporting of service

rendered by an individual employed by a tax supported community or

junior college while enrolled as a part-time student in that same

tax supported community or junior college for a school fiscal year

before the 2018-2019 school fiscal year are not subject to the

assessment of daily late fees and daily interest penalties under

subsection (8) but are subject to the payment of regular late fees

and regular interest under subsection (7).

(12) As used in this section, an "intentional" error or

omission includes, but is not limited to, the following:

(a) A knowing and willful representation that service was

performed if the service was not performed.

(b) A knowing and willful submission of a report that contains

material misrepresentations or falsifications, or the knowing and

willful failure to submit a required report.

fraudulent, or misleading nature undertaken to gain compliance or

the appearance of compliance with this act.

Sec. 42a. (1) ~~Not later than 60 days after the effective date~~

~~of the amendatory act that added this section,~~ By August 31, 2018,

each reporting unit that is a tax supported community or junior

college shall submit a report to the office of retirement services

with the information necessary for the retirement system to

complete the report under subsection (2), as determined by the

retirement system.

(2) ~~Not later than 90 days after the effective date of the~~

~~amendatory act that added this section,~~ By September 30, 2018, the

office of retirement services shall submit a report to the senate

and house of representatives committees on education. The report

required under this subsection must include all of the following

information, based on information included in the reports submitted

to the retirement system under subsection (1), for each reporting

unit that is a tax supported community or junior college:

(a) For each of the 4 school fiscal years preceding the state

fiscal year ending September 30, 2018, the number of individuals

employed by the tax supported community or junior college while

enrolled as a part-time student in that same tax supported

community or junior college.

(b) For each of the 4 school fiscal years preceding the state

fiscal year ending September 30, 2018, the amount of reporting unit

contributions the tax supported community or junior college

contributed under section 42 associated with an individual employed

by the tax supported community or junior college while enrolled as

a part-time student in that same tax supported community or junior

college.

fiscal year ending September 30, 2018, the amount of reporting unit

contributions the tax supported community or junior college failed

to contribute under section 42, if any, associated with an

individual employed by the tax supported community or junior

college while enrolled as a part-time student in that same tax

supported community or junior college.

(3) Subject to sections 43h and 43i, each reporting unit shall

make appropriate adjustments and corrections to its reporting and

crediting of service to correspond with the information contained

in the report under this section, in a time and manner determined

by the retirement system.

Sec. 43h. (1) An individual who was first employed by a

reporting unit that is a tax supported community college or junior

college before July 1, 2014, and who did not previously have that

service reported by a reporting unit on his or her behalf, may

claim and thereafter be credited with the service only if all of

the following apply:

(a) The individual is described in section 5(1)(p).

(b) The individual files a written application with the

retirement board after January 1, 2019 but not later than 5 p.m.

Eastern Standard Time on January 31, 2020 in a method determined by

the retirement system. A written application submitted by an

individual under this subdivision is irrevocable.

issued by the retirement system that corresponds with the amount

the individual would have contributed according to the schedule

governing contributions in effect at the time of that service, plus

regular interest on the contributions. The retirement system may

determine the time and manner of payment of the total amount under

this subdivision.

(2) An individual who satisfies the conditions of subsection

(1) must have service credited in an amount commensurate with the

contributions remitted under subsection (1) in a time and manner as

determined by the retirement system.

(3) An individual described in section 5(1)(p) who was first

employed by a reporting unit that is a tax supported community or

junior college before July 1, 2014 and who does not satisfy the

conditions of subsection (1) shall forfeit any claim to receive

credit for that service unless the individual can demonstrate to

the satisfaction of the board that a reasonable person in the same

circumstance as the individual would not have adequate notice of

the application deadline under subsection (1)(b).

(4) Subject to section 43i, the retirement system shall

determine and assess a supplemental employer contribution for each

reporting unit that is a tax supported community or junior college

that corresponds with service claimed under subsection (1).

(5) Except as otherwise provided in this subsection, on

payment by a reporting unit of the contributions assessed under

subsection (4), a reporting unit's financial obligation for service

claimed under subsection (1) is considered satisfied in full. If

any service is thereafter claimed on the basis of lack of adequate

notice under subsection (3), the reporting unit shall pay the

contributions assessed in a time and manner as determined by the

retirement system.

(6) Notwithstanding any other provision of this act, service

otherwise creditable under this section that is not claimed in the

manner provided under this section is considered not reportable.

Sec. 43i. (1) The retirement system shall determine and assess

a supplemental employer contribution for each reporting unit that

is a tax supported community or junior college on the basis of

information reported by the reporting unit under section 42a, and

payroll data reported to the retirement system by the reporting

unit. The contribution determined and assessed under this section

must take into account all of the following:

(a) The extent to which the reporting unit remitted employer

contributions and related retirement information for individuals

employed by the reporting unit while enrolled as a part-time

student in that same reporting unit for each of the 4 school fiscal

years preceding the state fiscal year ending September 30, 2018.

(b) The contribution rate must be calculated in the manner

provided by section 42.

(2) The retirement system shall determine and assess a

supplemental employer contribution for each reporting unit that is

a tax supported community or junior college on the basis of service

credit claimed under section 43h for the time period and payroll

data reported to the retirement system by the reporting unit. In

making its determination under this subsection, the retirement

system shall take into account all of the following:

(a) The amount and duration of service claimed.

(b) The retirement plan election made by an eligible

individual, as applicable.

(3) The contribution rate for service under subsection (2)

must be calculated in the manner provided by section 42.

(4) On payment by a reporting unit of the supplemental

employer contribution rate assessed under this section, the

reporting unit's financial obligation for the service is considered

satisfied in full.