Corrective Action Plan (CAP) Monitoring Process

What is CAP Monitoring?

Section 10(6) of the Act states that “The board shall monitor each underfunded local unit of government’s compliance with this act and any corrective action plan. The board shall adopt a schedule, not less than every 2 years, to certify that the underfunded local unit of government is in substantial compliance with this act.” Generally, CAP monitoring serves as a check-in by the Board to ensure that approved CAPs are still on track to address their underfunded status and that local governments remain in compliance with the Act. The Board’s CAP Monitoring Policy and Procedures document outlines the Board’s methodology in the monitoring process, as well as the criteria by which local governments are reviewed.

Is there a form that needs to be completed for the CAP monitoring process?

Yes, Treasury has developed a form that is required to be completed as part of the CAP monitoring certification of the compliance process. This form will ask the local government to review and certify the Board’s CAP monitoring criteria.

What additional information should be provided in the corrective action plan monitoring process?

The Board’s CAP Monitoring Policy and Procedures outlines criteria and recommended supporting documentation that will be considered in the review of local government Corrective Action Plan Monitoring certifications. Recommended supporting documentation includes, but is not limited to:

1. A projection for the duration of the CAP that includes, but is not limited to, assets, liabilities, funded ratios, normal cost payments (if applicable), actuarial assumptions, and retiree benefit payments, using reasonable calculations;
2. Governing body approval for any additional actions proposed during the monitoring process;
3. The Board recommends that supporting documentation include a projection of all annual retirement payments (Pension ADC(s)+OPEB Benefit Payments(s)+all additional contributions) as a percentage of projected governmental fund revenues for the ensuing five years. A local government should project governmental fund revenues using a reasonable forecast based on historical trends and projected rates of inflation. This analysis may include projected enterprise funds allocated specifically to pay retirement costs.

How do I calculate the highest combined annual retirement payment as a percentage of our projected governmental revenues over the next five fiscal years as required in section 4 of the Corrective Action Plan Monitoring: Application for Certification of Compliance?

This section is used to evaluate the sustainability of the retirement costs for a local government as documented in its approved corrective action plan. Treasury has developed a worksheet and additional instructions to assist in the completion of section 4. Documentation used to complete this section will include the local government’s pension valuation(s), OPEB valuation(s) and/or projection schedule, and most recent audited financial statements.

• Enter the most recent fiscal year in the first cell of the worksheet.
• Review the projected ADC for your pension system(s) for the next 5 years, note the payment amounts on the spreadsheet for each of the 5 years.
• Review your OPEB benefit payment projections for the next 5 years, note those amounts in the corresponding column providing this amount for each fiscal year.
• Next, based on your local government’s funding policy and/or corrective action plan, document any additional payments above the ADC payment for pension, and any additional payments above the benefit payment amount for OPEB in their respective columns (these additional contributions may be documented in the system valuation(s) or corrective action plan(s)).
• Finally, review the most recent audited financial statements to project governmental revenues for the next 5 years. Using the most recent governmental fund revenue number found in the Statement of Revenues, Expenditures, and Changes in Fund Balance, note the current total governmental revenue for the first fiscal year. The worksheet will complete the subsequent 4 years, selecting the projected annual increase in revenue (you may replace these numbers if you have a more accurate projection). If there are enterprise funds that are used to pay retirement costs that are not included in your governmental revenues, you may include those in the enterprise fund revenue column.
• The worksheet will calculate the retirement contributions as a percentage of revenue for all years in which data is entered.

We have not received an updated valuation since the last time we filed. Do we need a new valuation to complete the Sustainability Certification (Section 4) within the Application for Certification of Compliance (Form 5720)?

No, you are not required to receive a new valuation. The Sustainability Certification section of the application may be completed using your most recent valuation. If your plan to address underfunded status is substantially different, we recommend either working with your auditor or an actuarial professional to create an updated projection. You may also construct an internal analysis to complete Section 4. Additionally, Treasury has created a sustainability calculation worksheet to aid local governments with the completion of Section 4.

Our valuation does not include all the required information to complete the Sustainability Certification (Section 4) within the Application for Certification of Compliance (Form 5720). Do we need a new valuation or actuarial projection?

No, if the required information cannot be found in your most recent valuation or actuarial projection, you may use an internal projection to answer this section. This may include, but is not limited to, evaluating the recent historical averages and trends for all retirement benefit payments and governmental fund revenues.

Please submit any supporting documentation outlining how you determined your future costs, including Treasury’s sustainability calculation worksheet. In the future, we recommend working with your auditor or actuarial professional to ensure this information is included in future valuations.

To complete the Sustainability Certification (Section 4) within the Application for Certification of Compliance (Form 5720), we are asked to include future projections for a retirement system(s) that is not underfunded and does not require a corrective action plan. Do we need a new valuation to provide this information?

No, if the required information cannot be found in your most recent valuation or actuarial projection, you may use an internal projection to complete this section. It is important to include a projection of all annual retirement payments - regardless of the system’s funded status - to accurately estimate total annual retirement payments as a percentage of governmental revenues. An internal projection may include, but is not limited to, evaluating the recent historical averages and trends for all retirement benefit payments and governmental fund revenues.

Please submit any supporting documentation outlining how you determined your future costs, including Treasury’s sustainability calculation worksheet. In the future, we recommend working with your auditor or actuarial professional to ensure this information is included in future valuations.

My retirement system is in corrective action; however, it did not trigger as underfunded on the last Retirement System Annual Report (Form 5572). Does our local government need to submit a Corrective Action Plan Monitoring: Application for Certification (Form 5720)?

Systems in corrective action that no longer trigger as underfunded are required to complete a Form 5720.

My local government has multiple retirement systems in corrective action; however, one or more systems did not trigger as underfunded on the last Retirement System Annual Report (Form 5572). Can we request that the system(s) that no longer triggers as underfunded be removed from corrective action?

No. All retirement systems in corrective action must be funded before the Municipal Stability Board removes any systems.     

How are local governments removed from corrective action?

A local government that received a determination of underfunded status and request to file a CAP per Public Act 202 of 2017 (the Act), may be released from underfunded status and monitoring by the Board as follows:

1. For local governments in corrective action with retirement systems that failed to meet the Act’s funding requirements:

   Example Situation: On the most recently filed retirement system annual report (Form 5572), a local government with an approved CAP no longer triggers underfunded status per the Act.

   Conditions for removal from corrective action:

   • The local government filed a subsequent year’s Form 5572 showing that the underfunded system now meets the Act’s funding requirements.
     • Local governments meeting this criterion may request to be removed from the CAP process and purview of the Board.

       OR

     • The local government may be removed during the CAP monitoring process if the underfunded system has failed to trigger as underfunded during the last two annual Form 5572 submissions. Alternatively, the local government may be removed during the CAP monitoring process if the underfunded system(s) funded ratio is at least 5% greater than the Act’s designated minimum funded ratio in the most recent Form 5572 submission (e.g. an OPEB system is 45% funded when underfunded status is below 40%).

   The Board may vote to release these local governments from the CAP process and purview of the Board, thereby removing underfunded status.

2. For local governments in corrective action for failure to file the retirement system annual report (Form 5572):

Example Situation:  The local government was required to submit a CAP for failure to file the Form 5572; however, information in their audited financial statements shows that the local government would not have been determined to be underfunded had the required Form 5572 been completed by the due date and submitted to Treasury.

Conditions for removal from corrective action:

• The local government subsequently filed the Form 5572 showing that they meet the Act’s funding requirements.