PA 17-107—HB 7296

Planning and Development Committee


SUMMARY: For certain municipalities participating in the Municipal Employees Retirement System (MERS), this act creates an alternative method for making required payments towards the unfunded costs of future pensions for employees brought into the system. Prior law generally required municipalities to pay this unfunded liability in annual installments over a period of up to 30 years. The act instead allows certain municipalities to pay all or part of the unfunded liability by issuing bonds and establishes procedures they must follow when issuing the bonds. It refers to these bonds as “MERS pension funding bonds.”

The act applies regardless of any state or local law concerning the authorization, issuance, or appropriation of bonds, notes, or other obligations. It authorizes the Office of Policy and Management (OPM) secretary, in consultation with the state treasurer, to adopt regulations establishing guidelines on municipal compliance with the unfunded liability payments to the Municipal Employee Retirement Fund (MERF) and MERS pension funding bonds.

EFFECTIVE DATE: July 1, 2017


Eligible Municipalities

The act allows a municipality participating in MERS that has an “unfunded accrued liability to the system” as of July 1, 2017 to authorize and issue MERS pension funding bonds to pay all or part of its outstanding liability plus the bond issuance costs. It defines this liability as the amount necessary to pay for future employee pensions based on the employees' service before joining the system, reduced by any amount transferred to MERF from other retirement funds on account of such employees. The retirement commission determines this unfunded liability based on consistently applied sound actuarial principles.

Notice of Municipal Intent to Issue Bonds

A municipality issuing these bonds must, at least 30 days before the issuance, notify the OPM secretary, state treasurer, and retirement commission of its intent to issue the bonds and provide:

1. the amount of its outstanding unfunded accrued liability to the system based on the existing pension amortization payments schedule, as determined by the retirement commission based on consistently applied sound actuarial principles;

2. the amount of any remaining annual pension amortization payments scheduled for payment by the municipality for the portion of its unfunded liability to the system that the bonds will not offset;

3. a comparison of the anticipated effects of funding the liability through bonds versus doing so through annually scheduled payments;

4. documentation of the municipality's authorization of the bond issuance, including a certified copy of the resolution or ordinance authorizing the bond sale and an opinion by a nationally recognized bond counsel as to the due authorization to issue the bonds; and

5. any other information the OPM secretary, treasurer, or retirement commission requires or requests in order to carry out the act's provisions.

Final Financing Summary

The act requires the municipality to submit a final financing summary to the OPM secretary, treasurer, and retirement commission within 10 days after the bond sale. The summary must (1) include any final official statement for the bond issuance and (2) compare the anticipated effects of funding the liability by issuing bonds versus doing so by making annually scheduled payments.

Bond Structure

Under the act, MERS pension funding bonds are general obligations of the municipality (i.e., backed by the full faith and credit of the issuing municipality). They must be either (1) serial bonds that mature in annual or semiannual principal installments or (2) term bonds with mandatory annual or semiannual deposits into a sinking fund. (A sinking fund is a fund created to regularly set aside funds sufficient to pay the debt.) Despite any state or local law to the contrary, the first installment of any series of such bonds must mature, or the first sinking fund payment must be made, no later than 18 months after the bonds are issued. Also, the last installment or payment must be made within 30 years from the issuance date.

Forms and Conditions of Bond Sale

The act allows, despite any state or local law to the contrary, municipalities to sell the bonds at public sale through sealed proposals, negotiation, or private placement. They must do so in the manner, at the price, at the time, and on the terms and conditions that the municipality or its bond issuance board or officers determine is in the best interest of the municipality. The municipality may not issue temporary notes in anticipation of the bond proceeds.

Use of Bond Proceeds

Under the act, the municipality must pay the proceeds of any MERS pension funding bonds not used to pay the bond issuance costs to the retirement commission within 30 days after the sale. The proceeds must be used to fund all or part of the municipality's outstanding unfunded accrued liability to the system.

Refunding Bonds

The act authorizes a municipality to issue refunding bonds to pay, fund, or refund any MERS pension funding bonds before their maturity in accordance with state law. However, the “weighted average maturity” of the refunding bonds may not exceed the weighted average maturity of the outstanding MERS pension funding bonds being paid, funded, or refunded. (Weighted average maturity is the weighted average amount of time until the bonds come due. The act establishes a formula for this calculation.)

The municipality must notify the OPM secretary, treasurer, and retirement commission of its intention to issue refunding bonds at least 10 days before issuing them. It must give them a copy of any final, official statement within 10 days after issuing the refunding bonds.