HOUSE BILL No. 6378

September 25, 2018, Introduced by Rep. VanSingel and referred to the Committee on Financial Liability Reform.

A bill to amend 1980 PA 300, entitled

"The public school employees retirement act of 1979,"

by amending section 41 (MCL 38.1341), as amended by 2018 PA 181,

and by adding sections 43h, 43i, and 43j.

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).

(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 reporting unit" means a reporting unit that is

a university listed in the definition of public school employee

under section 6.

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 2, 2018, 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 otherwise meets the requirements of section

5(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.

this section is irrevocable.

(d) The individual fulfills the terms of any billing statement

issued by the retirement system that corresponds with the amount

the member would have contributed according to the schedule

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

regular interest on the contributions, before the individual

establishes a retirement allowance effective date.

(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 who was first hired by a reporting unit that

is a tax supported community or junior college before July 2, 2018

and who does not satisfy the conditions of subsection (1) shall

forfeit any claim to receive credit for that service unless good

cause is shown to the satisfaction of the board.

(4) A reporting unit shall remit employer contributions

required by this act for service credited under subsection (1),

inclusive of regular interest and any late fees, in a time and

manner determined by the retirement system.

Sec. 43i. After January 31, 2020, 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 school fiscal year

starting with the 2001-2002 school fiscal year.

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

provided by section 42, except as follows:

(i) The portion of the rate corresponding with pension

benefits must not include an assessment for normal cost or

actuarial accrued liabilities for service rendered before the 2000-

2001 school fiscal year.

(ii) The rate corresponding with health benefits must not

include an assessment for normal cost or any unfunded actuarial

accrued liabilities for service rendered before the 2011-2012

school fiscal year.

as provided under section 42.

Sec. 43j. (1) There is appropriated for the fiscal year ending

September 30, 2019, $650,000.00 to the office of retirement

services in the department of technology, management, and budget

for administration of the changes under the amendatory act that

added this section.

(2) The appropriation authorized in subsection (1) is a work

project appropriation and any unencumbered or unallotted funds are

carried forward into the following fiscal year. The following is in

compliance with section 451a(1) of the management and budget act,

1984 PA 431, MCL 18.1451a:

(a) The purpose of the project is to administer changes under

the amendatory act that added this section.

(b) The work project will be accomplished through a plan

utilizing interagency agreements, employees, and contracts.

$650,000.00.

(d) The estimated completion date for the work project is

September 30, 2020.