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7.1. SR 07-19-2010REQUEST FOR ACTION To Item Number Ci Council 7.1 Agenda Section Meeting Date Prepared by Administration ul 19, 2010 Tim Simon, Finance Director Item Description Reviewed by Annual Benefit Level discussion for the Elk River Fire Relief Lori ohnson, Ci Administrator Association Reviewed by Action Requested There is no request for action as the Elk River Fire Relief Association is not asking for any change in benefit level per year of service for 2011. The one item Council may want to discuss is keeping the $30,000 contribution for the next budget year as this amount has remained the same the past three years. Background/Discussion The Elk River Fire Relief Association, prior to August 1 of each year, is required to certify to the City the required municipal contribution for the following year. Also, a request for an increase in per year of service pension amount for the next year must be acted on by the Council before August 1. Given the current market conditions and funding ratio, the Elk River Fire Relief Association has requested no increase in benefit level for 2011. The Elk River Fire Relief Association has assumed a rate of return on investments of 5 percent for 2010 in the form SC-10 which is certified to the State Auditor's office. The 5 percent is the recommendation from the reliefls investment advisor -The Parr McI~tiight Wealth Management Group of Wells Fargo Advisors based on the 60% equities and 40% bond portfolio. As of July 9, 2010 the rate of return on investments is approximately a negative 2.21 percent. Relief association board members will be at the meeting to go over any questions the Council may have. Year 12/31/2009 12/31/2008 12/31/2007 12/31/2006 12/31/2005 Funded Rate 87.2% 70.9% 114.7% 114.8% 105.9% Financial Impact The preliminary 2011 budget anticipated a voluntary contribution of $30,000 in the Fire Administration budget. If Council would like to continue the $30,000 amount it will cover the required contribution in the amount of $29,119. Attachments • Memo from Elk River Fire Relief President Scott Schmitt • Statement of Position -Required Municipal Contributions to Volunteer Firefighters' Pension Plans C:\Documents and Settings\XPMUser\Local Settings\Temporary Internet Files\OLK66\Fire relief benefit levels 07 19 IO.doc /4CtlOf1 Motion by Second by Vote Follow Up C:\Documents and Settings\XPMUser\Local Settings\Temporary Internet Files\OLK66\Fire relief benefit levels 07 19 ]O.doc :ver Fire Department July 19, 2010 To: Mayor and City Council From: Scott Schmitt, President of the Elk River Fire Department (FRED) Relief Association Baclc~ound of the Association The ERFD Relief Association is made up of the active paid-on-call members of the ERFD. The purpose of the association is to provide retirement, disability and death benefits to the members or beneficiaries of members of the department. The pension benefit is also one way to encourage volunteer or paid-on-call members to "stay on the job". The State of Minnesota has provided the major share of funding for the association through distribution of the money collected from a gross earnings tax on fire insurance premiums sold in the state. The funds are allocated to the departments based on the population and property values in the area served by that department. There is a strong relationship between state fire aid and the number of fire-related calls a fire department responds each year. The City has also shown continued support of the Relief Association as exampled by past contributions and the three year commitment of $30,000 commencing in 2008. State law requires that a relief association be governed by arsine-member board of trustees. The ERFD Relief Association is directed by six trustees elected by members of the ERFD, the fire chief, the city Finance Director, and the Mayor. A minimum of four meetings are held each year to oversee the management of the Association's funds. Tie of Pension Plan The members of the Relief Association are covered by a defined benefit plan. The benefit level of the plan is determined by the number of members, their length of service, and the value of the relief fund. Benefit level studies are performed on an annual basis. When a benefit level increase is warranted an approval request is made to the City Council. The year 2011 will be our fourth consecutive year of not having a funding rate that would merit an increase request. Investments Approximately ninety-seven percent of the Reliefs assets have been transferred over to the Parr McKnight Wealth Management Group. The Parr McKnight Group manages the funds for over fifty relief associations in the State and has a consistent record of beating the State Board of Investment. Our funds are allocated similar to the State Board of Investment Income Share fund which invests sixty percent in stocks, thirty-five percent in bonds and five percent in cash. The Relief Board believes in long term investing and has resisted attempting to time market moves. Funding Ratios The ERFD relief Board believes that it has fiduciary responsibilities to both the membership and to the Council. The responsibility to the membership is to seek the highest financially sound benefit level. The responsibility to the Council is to not expose the city to any financial risk associated with mandatory contributions. Historically after the State and City contributions our investments only needed returns of 2-3% to cover normal costs and stay one hundred percent funded. Str teQv The Relief Board values the long term support and working relationship with Council. We recognize that these continue to be fiscally challenging times. The annual State reporting schedules are used to determine any mandatory city contributions. The formula used to calculate the City contribution uses some numbers that are historical and some that are projected. The 2010 investment gain is one of the numbers that is projected in the formula. Under the advice of the Parr McKnight Group we are projecting an investment gain of five percent for 2010. The five percent investment gain produces a mandatory city contribution of $29,119, which is consistent with the previously budgeted contributions. This mandatory contribution is due sometime in 2011. The following is the recent contribution history: Year Contribution Amount Portion that is Mandato 2005 $28,100 0 2006 $28,950 0 2007 $29,800 0 2008 $30,000 0 2009 $30,000 0 2010* $30,000 $28,516 * -anticipated The recovery has been a bumpy road but we have been able to keep the mandatory City contribution to less than what has been a budgeted contribution. Action Requested None: The Relief Association membership thanks the Council for its past and future support. " ~`~"'~~`''~ ~ STATE OF MINNESOTA '~ [. e', .~y. +. ~ ~J ;,~.~.~-`. OFFICE OF THE STATE AUDITOR ~~;~, v ~~; ~~ '''' "" _`J SUITE 500 "=~~'' `V 525 PARK STREET REBF.,CCA OTTO SAINT PAUL, MN 55103-2139 STATE AiJDITOR (651)296-2551 (Voice) (651)296-4755 (Fax) state.auditor@state.mn.us (E-mail) I-800-627-3529 (Relay Service) Statement of Position Required Municipal Contributions to Volunteer Firefighters' Pension Plans State law requires a municipality to pay a minimum annual contribution to the special fund of its affiliated volunteer fire relief association, unless the special fund is fully funded or fire state aid is sufficient to cover the municipal obligation. ~ The special fund is a fund established and maintained within a relief association to pay service pensions to retiring members. A pension plan is "fully funded" when there are sufficient assets to cover future liabilities. The funded status of a special fund is affected primarily by changes to benefit levels (i.e., liabilities increase) and by investment gains or losses (i. e., assets increase or decrease). Benefit increases and investment losses decrease a fund's assets, thereby increasing the likelihood that a municipal contribution will be required. A decrease in the funded status will also likely increase the size of the required contribution. Whether a municipal contribution is required and the amount of the required contribution is determined by using a statutory formula. The formula varies depending on whether the plan is a lump sum plan or a monthly service pension plan.2 °-,-~ Lump Sum Plans For lump sum plans, the minimum required municipal contribution equals the financial requirements of the special fund minus I) the amount of fire state aid to be received during the following calendar year; and 2) the amount of any contributions to the special fund from the active members of the relief association to be received during the following calendar year. In addition, five percent annual interest on the assets is also subtracted.3 ~ Minn. Stat. § 69.772, subd. 3 & 4; Minn. Stat. § 69.773, subd. 5. In some instances, a municipal contribution may be triggered even though the pension plan is fully funded. 2 See Minn. Stat. § 69.772, subd. 3 (for lump sum service pensions) and Minn. Stat. § 69.773, subd. 5 (for monthly service pensions). There is no required municipal contribution for a defined contribution plan. s Minn. Stat. § 69.772, subd. 3(d). Reviewed: July 2010 Revised: July 2010 2009-2001 This Statement of Position is not legal advice and is subject to revision. An Equal Opportunity Employer The minimum required contribution is calculated by the officers of the relief association during the month of July for the following year.4 To calculate the minimum required municipal contribution, the officers need to know the special fund's financial requirements for the following year. In July, the officers calculate the financial requirements for the following year and the overall funding balance for the current calendar year. If the special fund is not fully funded, the financial requirements for the following calendar year are determined by taking into account 1) the total accrued liability for all active and deferred members of the relief association, calculated for the following calendar year; 2) the increase in the total accrued liability for the following calendar year over the present calendar year; 3) the amount of anticipated future administrative expenses; and 4) one-tenth of the deficit resulting from either an increase in the service pension or an investment loss occurring over the last ten years. The deficit can be amortized over ten years. If the special fund is fully funded, the financial requirements for the following calendar year are the total of 1) the increase in the total accrued liability for all members for the following calendar year over the present calendar year; and 2) the amount of anticipated future administrative expenses. iV~~ Monthly Service Pension Plans For monthly service pension plans, the financial requirements of the special fund are based on the most recent actuarial valuation. Each fire relief association must determine the minimum obligation of the municipality for the following calendar year "on or before August 1 of each year."5 The "most recent actuarial valuation" included in the calculation would generally be a valuation from January 1 of the same year or December 31 of the prior year. For most plans, the Governmental Accounting Standards Board (GASB) requires an actuarial valuation every two years.b In addition, a new actuarial valuation is required whenever there is a benefit chan~e. If the plan is in deficit, the statute permits amortization over a period of years. ~,+~~ Defined Contribution Plans For defined contribution plans, the individual volunteer firefighter experiences the gains and the losses. The municipality has no obligation to make contributions to offset losses if they occur, although it can make a voluntary contribution to the special fund. a The Schedule Form, provided by the Office of the State Auditor, calculates the amount of any required municipal contribution for the following year. For example, the 2010 Schedule Form will calculate the required municipal contribution amount for the year 2011. s Minn. Stat. § 69.773, subd. 5(a). b See Minn. Stat. § 69.051, subd. 1 (financial statements in conformance with generally accepted accounting principles); GASB Statement 25, para. 35 (biennial actuarial valuations required for financial reporting purposes). Minn. Stat. § 69.773, subd 4 (d). Reviewed: July 2010 2 2009-2001 Revised: July 2010 Benefit Levels The level of benefits paid by a volunteer firefighter pension plan is usually set by agreement between the relief association and the municipality. Benefit level changes must first be discussed and adopted by the relief association through a change in its bylaws. The changes must be made in keeping with the relief association's bylaw amendment procedures and Open Meeting Law requirements. A relief association should then seek municipal approval of the benefit level change. The city council or town board can choose to approve the benefit level change or choose not to approve the change. Once the bylaws are ratified by the municipality, however, the benefit levels are guaranteed by the municipality. The municipality assumes responsibility for ensuring the special fund has sufficient assets to cover approved benefit levels. For those relief associations that are affiliated with an independent corporation rather than a municipal fire department, benefit level changes must be approved by the board of the independent nonprofit firefighting corporation. In addition, the independent nonprofit firefighting corporation is responsible for making any required contributions to the relief association. In limited circumstances, a volunteer fire relief association has the authority to increase its benefit level without municipal ratification. However, if a municipal contribution is later required, the contribution level will be calculated using the last benefit level ratified by the municipality.g If there was never a resolution to ratify a benefit increase, the relief association must return to the last ratified level. Municipalities do not have authority to unilaterally change a relief association's benefit level. Municipalities cannot initiate a change in benefit levels, rescind benefit increases, or give contingent approval to benefit changes. Payment of Required Municipal Contributions To fulfill its obligation to provide at least the minimum required municipal contribution, a municipality may use any source of public revenue, and it may levy taxes. For monthly service plans, for example, a municipality may levy taxes "without any limitation as to rate or amount and irrespective of any limitations imposed" by any other law or regulation.9 If the benefit level the relief association is operating at was properly established and approved by the affiliated municipality, the municipality is required under state law to make any contributions that become due at that benefit level. If the municipality does not include the full amount of the minimum municipal contribution in its levy for any year, the officers of the relief association must certify that amount to the county auditor, who shall spread a levy in the amount of the certified minimum municipal contribution on the taxable property of the municipality.10 $ Minn. Stat. § 424A.02, subd. 10. 9 Minn. Stat. § 69.773, subd. 5(d); § 69.772, subd. 4(c). 10 Minn. Stat. §§ 69.772, subd. 4(d); 69.773, subd. 5(e). Reviewed: July 2010 3 2009-2001 Revised: July 2010