Act 205 of 1984 requires plan sponsors to contribute a minimum amount to the plan each year called the Minimum Municipal Obligation, or MMO. The MMO for the upcoming year is required to be presented to the governing body of the municipality sponsoring the plan by the plan’s Chief Administrative Officer in September of each year. The MMO calculations are based on the active member payroll for the preceding year, as estimated at the time the MMO is being calculated, and the cost components from the most recent actuarial valuation.
The MMO is the sum of the plan’s Normal Cost, Administrative Expenses and Amortization Payment, less Expected Member Contributions and any Funding Adjustment. These are calculated as follows:
- The Normal Cost is calculated by multiplying the active member payroll by the Normal Cost Percentage (the Normal Cost as a percentage of payroll) determined in the most recent actuarial valuation.
- The Administrative Expense is calculated by multiplying the active member payroll by the Administrative Expense Percentage (the Administrative as a percentage of payroll) determined in the most recent actuarial valuation. Some plans may determine the Administrative Expense as a flat amount or based on each year’s expected expenses.
- The Amortization Payment is the annual amount required to fund the plan’s unfunded actuarial accrued liability determined in the most recent actuarial valuation.
- The Expected Member Contributions are calculated by multiplying the active member payroll by the member contribution rate applicable to the MMO year.
- If a plan’s assets, at the most recent actuarial valuation, are in excess of the plan’s actuarial accrued liability, there is no Amortization Payment. Instead, 10% of this excess is used as a Funding Adjustment to reduce the Minimum Municipal Obligation.
The MMO may be funded by general municipal pension system State Aid allocated to the plan; however, the municipality is ultimately responsible for funding the MMO. If the MMO is not funded by the end of the year, the shortfall is increased with interest from the beginning of the year.
The following is a example that shows how the MMO is calculated: