FISCAL NOTE
Date Requested: February 18, 2025
Time Requested: 04:38 PM |
| Agency: |
Municipal Pensions Oversight Board |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 2825 |
Introduced |
HB2547 |
|
|---|
| CBD Subject: |
Municipalities; Public Safety; Retirement |
|---|
|
FUND(S):
Special Revenue
Sources of Revenue:
Special Fund
Legislation creates:
Increases Existing Expenses
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The proposed increase to the threshold for capping cost of living allowance (COLA) increases in retirees and beneficiaries of Municipal Policemen’s Pension and Relief Fund (Police Plan) and Municipal Firemen’s Pension and Relief Fund (Fire Plan) would have limited direct impact on the cost to the Municipal Pension Oversight Board (MPOB). Cost increases would be limited to a single year following implementation in which the firm contracted by the MPOB for actuarial services would need to re-tool existing processes to determine the effect of this increase on the actuarial valuation of each of the 53 plans for which the MPOB provides oversight.
The MPOB’s currently contracted actuary, Bolton Partners, has calculated preliminary projections for the effects of this change to the COLA threshold. A municipality which authorized the creation of a Police Plan and/or Fire Plan would experience significant increases to the cost to operate that plan over the life of the liability. The present value of future benefits, which is the value that would have to be invested on the valuation date so that the amount invested plus investment earnings would provide sufficient assets to pay all projected benefits and expenses when due, would increase, in the aggregate across all 53 pension plans, by an average of 11.4% or approximately $202,190,000.
A plan change of this type would also have a significant impact on the actuarial accrued liability (AAL). The AAL is the portion of the present value of future benefits allocated to service before the valuation date in accordance with the actuarial cost method and represents the present value of benefits expected to be paid from the plan in the future allocated to service prior to the date of the measurement. On average each pension plan would see an increase in the plan’s AAL of 11.3%, with the smallest projected increase being 3.1% and the largest 14.7%. According to West Virginia Code §8-22-20(h), “…impacts on the funding deficiency due to plan changes shall be amortized over closed five year periods.” As a hypothetical example, a plan with an AAL of $40,000,000 could expect an increase to that liability, based on the average increase across all plans, of $4,520,000. This liability increase would then need to be paid, by the municipality, into the pension plan fund over a five-year period, for which the amortization would be approximately $1,004,444. Increases in the AAL will result in an estimated 4.4% average decrease in the funded status of all 53 plans, with the smallest projected decrease being 1.3% and the largest 16.2%.
In addition to the increase in AAL the normal cost required to be paid by the municipality into the pension fund each year would also increase. On average this increase is expected to be 17.2%, with the smallest projected increase being 0% and the largest 19.9%. This increased cost would be persistent for the remainder of the existence of active members in the pension plan, relative to current cost projections.
For plans using an actuarily sound method of funding, this increase in normal cost simply increases the amount which the municipality must contribute each year. For plans using an actuarily unsound funding methodology, such as the Alternative Funding Methodology, this increase in required normal cost may cause their regularly required payments to be insufficient to meet the requirement. Plans falling into this potential scenario include the least well-funded plans for which the MPOB provides oversight. Included amongst these plans is the South Charleston Firemen’s Pension Plan, whose funded status is projected to decrease from 10.9% to 9.5% should this change be enacted. Furthermore, upon implementation of this change the South Charleston Firemen’s Pension Fund could automatically fail the 15-year solvency test, which is required by §8-22-26a(f) and §8-22-20(c)(1), given its current contribution requirements. If this were to happen, it would trigger additional employer, and potentially, employee contributions.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2025
Increase/Decrease
(use"-") |
2026
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
0 |
15,000 |
0 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
15,000 |
0 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
The MPOB expects that the firm contracted by the MPOB for actuarial services would need to re-tool existing processes to determine the effect of the changes on the actuarial valuation of each of the 53 plans for which the MPOB provides oversight. This increased cost would only appear in the year after implementation of the change while the actuary completed the annual actuarial valuations using the new COLA assumptions.
Memorandum
If there are any questions regarding the impact on a specific municipality, Police Plan, or Fire Plan you can contact the MPOB for further questions at either (304) 356-2422 and MPOB@wv.gov or using the contact information provided below.
Person submitting Fiscal Note: Matthew Pauley, CFO
Email Address: matthew.d.pauley@wv.gov