Effective Oct. 1, 2018, school districts will no longer make unfunded actuarial accrued liability (UAAL) contributions as a percentage of payroll. Instead, the amount owed will be calculated using the fiscal period ended Sept. 30, 2017, payroll, adjusted for the change in current operating expenditures (COE) of the district over time.
After these upcoming changes were originally established under Public Act (PA) 92 in July 2017, the Michigan Office of Retirement Services (ORS) explained that a settlement would occur after district contributions were made, allowing for a comparison between what districts paid and were owed. However, this approach would create more complexity in accounting and budgeting.
Plante Moran met with the ORS, the Michigan Department of Education (MDE), and the Michigan School Business Officials (MSBO) over the last few weeks to address these concerns. We’re happy to report, that based on our feedback, the ORS developed an alternative calculation using the districts’ FY16 and 17 COE. By changing the COE date, districts will now have the information necessary to budget for the obligation and eliminate the reconciliation process.
By changing the COE date, districts will now have the information necessary to budget for the obligation and eliminate the reconciliation process.
Revised formula for adjusted payroll
From this point forward, the COE-adjusted payroll for the state fiscal period ending Sept. 30, 2019, will be made using the following formula: COE Adjusted PayrollsfY19 = (1+%ΔCOEFY16-17)xPayrollsfY17
Key factors in applying the formula include:
- All COE calculations use the district fiscal year (July 1 to June 30).
- The UAAL obligation is paid on the state’s fiscal year.
- The change in COE applied to the 2017 payroll will compute the UAAL-adjusted payroll.
- The UAAL rate (20.96 percent) will be applied to the adjusted payroll to compute how much is owed over the next period.
- The “bill” will be included in the payments made to the ORS. Districts will no longer have to compute UAAL when processing payroll.
Some implications of this change include:
- Starting Oct. 1, 2018, payroll systems will need to remove payroll-based UAAL contributions.
- Districts will know what to budget for UAAL contributions beginning Oct. 1, 2018, for the remainder of the 2019 fiscal year. Prior to that date, UAAL contributions will occur as they did previously.
- The “billed” UAAL expense will need to be allocated to functions. The MDE will provide guidance, but it’s expected to mirror payroll allocation.
- UAAL will likely continue to be charged to grants, but the MDE is obtaining approval to do so.
- In determining what year-end accruals are at June 30 and for budget planning, the expectation cutoff would work similarly to other payroll-related accruals.
- Twelve-month employees would not have an accrual past June 30 (other than for obligations fixed at June 30 and paid in July).
- Ten-month employees will have an accrual for payments based on their portion of the total obligation through August 31.
- Each year, the amount owed for the following year would be determined in February, making the budgeting process for the amounts easier.
There are key questions yet to resolve surrounding the components of the calculation and the process. Some may be resolved legislatively, while others may require the ORS or MDE interpretation.
- Is COE only General Fund COE, or are there other funds to include? If other funds are to be included, which funds and which data?
- Will House Bill (HB) 5355 become law? This bill revises the allocation method away from COE to a use of payroll and purchased services.
- How will the calculation and the amount billed be reported to the district by the ORS? Note that the ORS has received approval for the new methodology and will provide guidance.
- How will the district know the billing is correct? The goal is for the method used to be transparent and allow districts to review and validate amounts as needed.
Stay tuned! Once these questions are resolved, we will all have a complete picture. In the meantime, the new framework helps provide districts with an approach to make initial estimates.