Act 205 of 1984 - The Municipal Pension Plan Funding Standard and Recovery Act
This municipal pension reform legislation was signed on December 18, 1984. Act 205 includes reforms for the funding, reporting, and financing of municipal pensions in Pennsylvania. The legislation addresses the following major issues.
• Standardized actuarial and financial reporting
• Minimum employer contribution requirements
• Revision of the allocation formula for distributing state aid to pension plans (including funding for non-uniformed plans)
• Recovery plan and additional state funding for “distressed” pension plans
• Revision of the distribution of State Foreign Fire Insurance taxes for Volunteer Firefighters Relief Associations
Actuarial and Financial Reporting
For the plan year commencing in 1985, each municipality and authority must have an actuarial report prepared for each defined benefit pension plan. The valuation must follow a prescribed format, and be calculated using standardized assumptions and cost methods. In addition, plan valuations must be performed biennially (every odd year - 1987, 1989, etc.). The retirement plan biennial valuation must be prepared and signed by an approved actuary. The definition of approved actuary is “a person who has at least five years of actuarial experience with public pension plans and who is either enrolled as a member of the American Academy of Actuaries or enrolled as an actuary pursuant to the Federal Employee Retirement Income Security Act of 1974.”
The reports must be submitted to the Public Employee Retirement Commission (PERC) every other year (biennially) beginning with 1985, regardless of the size of the plan, unless the plan is sponsored by a distressed municipality receiving Supplemental State Assistance. A distressed municipality must submit reports annually. Plans with 1,000 or more members must also submit a five-year experience investigation report every four years.
Act 205 actuarial reporting forms for all plans, including defined benefit and defined contribution, must be filed with PERC no later than the 31st business day of March following the year of valuation. The law clearly places the responsibility for supervision and direction of the plan with the Chief Administrative Officer of the pension plan, who is also responsible for filing the document. In the event the report is not filed in a “timely fashion,” all financing that the Commonwealth provides to the municipality for the pension plan may be withheld until the report is filed. In some instances, the withheld Commonwealth financing may be less than it would have been otherwise. All pension plans may pay the fees associated with the preparation of the actuarial reports and consulting services from the assets of the pension plan.
Amortization of Unfunded Liabilities
An unfunded liability is the amount by which the plan's liabilities exceed the assets. Effective January 1, 1985, the unfunded liability was recalculated for all municipal pension plans. The amount of the initial unfunded liability was required to be amortized over the next 30 years or the average future service of the active participants, whichever is less. Any change in the unfunded liability after 1985 is required to be amortized as follows.
• Any change in actuarial assumptions, or modification of benefits for active members, was required to be amortized over the next 20 years or the average future service of the active participants whichever is less.
• Any modification in benefits for retired employees that results in increased unfunded liabilities was required to be amortized over ten years.
• Any increase or decrease in the unfunded liability caused by actuarial experience (actuarial loss or gain) was required to be amortized over 15 years or the average future service of the active participants whichever is less.
Municipal pension plans sponsored by distressed municipalities are permitted to apply different rules to amortize their initial unfunded liability. In addition, the municipality may use the maximum amortization periods allowed for changes in unfunded liability without regard to the average future service.
Act 61 of 1997 permits a municipality to make an irrevocable election to eliminate the existing amortization bases, periods and annual payments in favor of a straight 10-year amortization of the current unfunded actuarial accrued liability. Municipalities considering this option should consult their actuary or consultant to discuss the short and long term advantages and disadvantages of this election.
Annually, Act 205 requires the Chief Administrative Officer of the pension plan to determine the total financial requirement and the Minimum Municipal Obligation (MMO) for the next year based upon the most recent actuarial report prepared under the requirements of Act 205 and submitted to PERC. Refer to the section on “Budgeting for Annual Pension Plan Costs” (page 22) for more information.
Prior to the adoption of any benefit plan modification by the governing body of the municipality, Section 305 of Act 205 requires that the Chief Administrative Officer of the pension plan provide the governing body with an actuarial study of the financial impact of the change.