Act 205 of 1984 sets forth funding requirements for pension plan sponsored by cities, townships and boroughs in the Commonwealth of Pennsylvania.
Act 205 requires the use of the Entry Age Normal Actuarial Cost Method, which funds members pensions over their working career.
Under Act 205 requirements, we amortize each component of the unfunded actuarial accrued liability based upon its source. The amortization period is equal to the average future service of the active plan members; however, it may not exceed the following periods:
- Experience gains and losses: 20 years
- Changes in Plan Benefits—Active Members: 10 years (20 years if change was mandated by law)
- Changes in Plan Benefits—Retired Members: 1 year (10 years if change was mandated by law)
- Changes in Actuarial Assumptions and Methods: 15 years
Municipalities that are Pl-ans that are Moderately or Severely Distressed (see Act 44 of 2009, below) can use these maximum periods, regardless of the average future service of the active plan members.
If the unfunded actuarial accrued liability is negative (i.e., if the actuarial value of assets exceeds the actuarial accrued liability), 10% of the excess, called a funding adjustment, is used to reduce the Minimum Municipal Obligation in lieu of the amortization amount.
The normal cost and amortization amounts determined under the Act 205 funding rules are used in the determination of the Minimum Municipal Obligation, which is the required annual contribution. The MMO for the upcoming year must be presented to the municipality’s governing body in September of each year.
To determine the MMO, the estimated payroll for the current year for all active members as of the date the calculation is prepared is multiplied by the Normal Cost percentage and Administrative Expense percentage. The sum of these amounts is added to the amortization amount to determine the total financial requirement. This is then reduced by the expected member contributions to determine the MMO.
The governing municipality is responsible for funding the MMO; however, it will be partially funded by General Municipal Pension State Aid allocated to the municipality. The MMO must be funded by December 31 of each year; any funding shortfalls must be repaid with interest.