4.2. SR 07-27-1998~ity of
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MEMORANDUM
Item #4.2.
TO:
FROM:
DATE:
SUBJECT:
Mayor & City Council
Pat Klaers, City Ad
July 27, 1998
Fire Department Relief Association Per
Year Benefit Level Retirement Plan
There are really two requests with this agenda item. The first request is for
the city to release its 1998 Relief Association contribution. The second item
is for the City Council to establish the per year benefit level for the Fire
Department Retirement Plan.
Regarding the city contribution to the Fire Department Relief Association, it
should be noted that there is $17,500 in the 1998 fire department budget.
However, in late October 1997, the City Council accepted a proposal which
showed the contribution level to be $20,150 in 1998. Accordingly, some of
this contribution will need to come from the city council contingency fund. It
is staffs recommendation the City Council, by motion, approve the release of
$20,150 in city funds to the Relief Association.
The second issue regarding the per year benefit level is more difficult to
address. Identifying the appropriate level is more of an art than a science
and the level of benefit for 1999, which is what the Council is being asked to
set, is generally based upon projections for returns on investments.
Staff agrees with the position of the Relief Association in that a significant
surplus in its fund does no one any good, and that they have a certain
obligation to pay at the maximum level possible for the benefit of the
firefighters. Additionally, staff applauds the recent investment planning of
the Relief Association.
The Relief Association is asking for an increase in the per year benefit level
to $2,970. This is an 11 percent increase from the 1998 level of $2,674.
Projections from the department (based on 9 percent this year and 7 percent
13065 Orono Parkway · P.O. Box 490 · Elk River, MN 55330 · TDD & Phone: (612) 441-7420 · Fax: (612) 441-7425
return in future years) shows that the per year benefit level can continue to
increase with a surplus still being shown in its assets.
To help explain to the Council why I feel that establishing the per year
benefit amount is somewhat a "best guess," one only has to look at the
projections from the department for last year. Last July the department
projected that the 1999 benefit level would not change from the $2,674
amount established in 1998. Using a 6 percent return per year estimate, the
department projected that the benefit level would go to $2,900 in the year
2000 (see attachment). As you can tell by the current request, the
investments have returned more than expected. The request this year takes
into consideration a conservative estimate last year and is providing for the
department to slightly catch up. I believe this is appropriate and I would
always like to be a little conservative and a year behind versus a year ahead
in the benefit level.
The economy and the stock market have been good the last few years. A
relatively modest percent of the department's assets is invested in stocks, so
a major correction in the stock market would not have a major impact on the
department's assets. Nonetheless, I believe that a 9 percent projection in
1999, followed by several years of 7 percent projections is somewhat
optimistic and I would prefer to be more conservative and simply catch up
again in future years.
There is no magic way to determine the appropriate level of per year benefit,
but I am more comfortable closer to the $2,900 per year level than pushing
the envelope as much as possible to the requested $2,970 level.
Attachments
· July 1997 Five Year Projection from Relief Association
· Chart of Per Year Benefit Changes Since 1981
Recommendation
It is recommended that the City Council release $20,150 in city funds; part
from the fire department budget and part from the city council contingency
fund, to the Fire Department Relief Association.
It is recommended that the City Council establish a per year benefit level for
the Fire Department Retirement Plan somewhere between $2,900 per year
and $2,970 per year.
JUL. ii, 1997 8:37AM ERMC
Elk River Fire Department Relief Association
5 year projections.
NO. 5441
, ..: -: ::' -. : ,: ..... :.
Scedule I!
.... Year §~r~e-'~-' '
Amount/yr
1998 $2 674 00
2OOO
2001
2002
2003
$1,154,382.00
._$1,174,022.00
Percent --
Funded .....
._. lOO.d~7
...... 97.67~/;'
101.02%
101.17%
100.17%
100.12%
Line ~/~/Line #7
Projection assumptions
State 2% contribution will increase at $2000.00/year
The City of Elk, River contributions is $17,500.00/year
Retirements of. two each odd year and one each even year ,
Adding Fire Fighters only' as Fire Fighters retire keeping the total roster at 34
Fund gains of 6% per year ,, ~,
Year Pension
Benefit
1981$ 300
1982$ 400
1983$ 500
1984$ 675
1985$ 800
1986$ 1,000
1987$ 1,200
1988$ 1,400
1989$ 1,500
1990$ 1,550
1991$ 1,850
1992$ 1,900
1993$ 2,100
1994$ 2,200
1995$ 2,350
1996$ 2,350
1997 $ 2,500
1998 $ 2,674
_~ty of
iver
MEMORANDUM
Item #4.2.
TO:
FROM:
DATE:
SUBJECT:
Mayor & City Council
Lori Johnson, Asst. City Administrator/
Finance Director
July 27, 1998
1999 Fire Relief Association Benefit
Increase
At the July 6 City Council meeting, Jim Nystrom made a presentation on
behalf of the Elk River Fire Relief Association in support of the Relief
Association's request to increase the per year of service benefit level to $2,970
for 1999. The City Council requested that staff review the Relief
Association's proposal and bring it back for Council action on July 27. As you
may remember, action on this item must be taken prior to August 1.
One of the main concerns in estimating future funding requirements is the
projected annual investment growth. Originally, the Relief Association had
used a nine percent investment return for future projections when
estimating fund assets and benefit amounts. Following discussion at a
Trustee's meeting, the projected investment return was decreased to seven
percent for all years except 1998 which remained at nine percent. The
information presented to the Council on July 6 was based on the lower
investment return. Although seven percent is a very reasonable return for a
retirement fund, because a city contribution may be required, ff there was a
sizable loss in the investment portfolio or some catastrophic event, there was
still some concern that the investment returns may be too optimistic.
Because the annual investment income of the Relief fund is a major but
sometimes volatile and uncertain source of revenue, it is important to review
the status of the fund without investment income. The attached spreadsheet
attempts to project the amount of investment income required annually to
sustain a $2,970 benefit level and remain fully funded. The most important
column is the end column, the estimated cumulative surplus or deficit. Also,
you will note that no investment income has been included, with the
exception of 1998 in order to determine the 1999 benefit level. The
surplus/deficit column indicates the amount of investment income the Relief
Association must realize in order to maintain full funding with a benefit level
13065 Orono Parkway · P.O. Box 490 · Elk River, MN 55330 · (612) 441-7420 · Fax: (612) 441-7425
of $2,970 per year. This data indicates that the investment income
requirements are very minimal for each of the future years. In fact,
generally between one to two percent annually. This information should give
the Council some comfort level as to its exposure in future years. Based on
the best assumptions available regarding retirements and future revenues, it
appears that the investment income required to maintain full funding should
be easily attainable. This is particularly true given the recent changes in the
investment ~]location of the Relief Association's portfolio.
Finally, the current request to increase to $2,970 per year of service does not
require a city contribution. However, the Council agreed as part of the
Firefighter Compensation package to contribute $20,150 in 1998. While it is
the Relief Association's obligation to offer the highest benefit possible to it's
members, keep in mind that the Council may approve any increase above the
current $2,674 per year of service up to the amount requested. The Council
should feel comfortable with the increase approved as the City is bound to
paying benefits at the level approved by the Council in the very unlikely
event that insufficient Relief assets are available to meet benefit obligations.
Action Requested
The Council is asked to consider the request to increase the 1999 benefit level
to $2,970 per year of service. The Council is also asked to authorize payment
of the previously approved $20,150 retirement contribution to the Elk River
Fire Relief Association.
\\elkriver \sys\shrdoc\councflXfdbeneft.doc
Elk River Fire Reh,~Y Association
Pension Fund
Estimated fund balance and investment requirements based on constant benefit
of $2,970 per year of service.
City and Estimated
Fund State Investment Retirements Fund
Date Value Revenues Income Paid Value
Accrued
Liability
Beginning
of Year
Jan. 1,1998 1192 77 107 86 1290 1274
Jan. 1,1999 1290 81 0 104 1267 1277
Jan. 1,2000 1267 83 0 205 1145 1182
Jan. 1,2001 1145 86 0 89 1142 1200
Jan. 1,2002 1142 89 0 155 1076 1155
Jan. 1,2003 1076 91 0 78 1089 1185
Estimated
Cumulative
Surplus/
(Deficit) at
End of Year
16
(10)
(37)
(58)
(79)
(96)
Presented in thousands - 000s omitted.
Estimated projections based on three percent increases in City and State Revenues and
retirements of one or two firefighters each year.
Data supplied by Elk River Fire Relief Association
7/24/98