8.5. SR 07-07-2014 City of
Elk Request for Action
River
To Item Number
Mayor and City Council 8.5
Agenda Section Meeting Date Prepared by
General Business July 7, 2014 Tim Simon, Finance Director
Item Description Reviewed by
Consider 2015 Benefit Level for Elk River Fire Cal Portner, City Administrator
Relief Association Reviewed by
Action Requested
Approve,by motion, an increase to the Elk River Fire Relief Association benefit level to $5,360 per year
of service effective January 1, 2015.
Background/Discussion
Prior to August 1 of each year,the Elk River Fire Relief Association is required to certify to the city the
required municipal contribution for the following year. A request for an increase in the per-year of
service pension amount for the next year (effective January 1) must also be acted on by the Council
before August 1.
The relief association operates under a defined benefit plan. The pension liability is calculated by the
number of active service years multiplied by a set benefit level. Members who retire with less than 20
years of service and have reached the age of 50 years and have completed at least five years of active
membership are entitled to a reduced service pension.
The association recommended at its June 4 board meeting to request an increase of 3.75%, or$193, from
the current benefit level of$5,167 which was last approved effective January 1, 2014, to $5,360 effective
January 1, 2015. The increase does not require a city contribution for 2015.
Over the past few years, relief assets have climbed back to a funding level over 110%. A combination of
investment returns,planning,and increases in State Fire Aid have helped with the recovery. The board
representing the association has changed its thought process from historically requesting increases to be
at 100% funding ratio,which didn't allow for much market volatility and if the market drops it may be
several years until the next increase. The current practice is to request smaller,gradual increases and
leaving the funding ratio over 110% to absorb more market volatility without triggering any mandatory
city contributions. The association will bring a policy forward on funding levels later this year as they will
be reviewing a draft policy at its next meeting.
The association's projections indicate that based on a 5-percent return to have a funding ratio over 110%
if this increase is approved. The year-to-date returns are 3.1 percent (May 31). The assets are managed
under The Parr McKnight Wealth Management Group of Wells Fargo. Brian McKnight will be at the
meeting if you have any questions about the 60% stocks and 40% bonds allocation that the association
maintains.
P a w E R E U 6 Y
NaA f RE]
The mayor, fire chief and finance director serve as trustees of the association, and are available to answer
questions. Relief association representatives will also be at the meeting to answer questions.
Financial Impact
The annual voluntary contribution of$30,000 is planned to be budgeted in 2015 in the Fire
Administration budget.
Attachments
• Benefit Level Worksheet
• Memo from President of the Elk River Fire Relief Association
ECity lk
Rive
Fire Department
July 2, 2014
To: Mayor and City Council
From: Scott Schmitt,President of the Elk River Fire Department (ERFD) Relief Association
Background 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 back 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 state fire aid was established in 1885 and has been the most stable source of
funding. According to the most recent state auditor's report, Elk River is in the 98%in the
amount received and the 97%in pension amount. The relief association does benefit from
the population and valuation that comes from the areas of Otsego and Big Lake Township
that is served by ERFD.
The City has also shown continued support of the Relief Association as exampled by this
year's budgeted contribution of$30,000.
State law requires that a relief association be governed by a nine-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.
Type 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. This year
the relief board approved a request to council for a 3.75%increase effective January 1 2015.
The per year benefit level would go from $5,167 to $5,360.
Investments
Approximately ninety-seven percent of the Relief's assets are invested through The Parr
McKnight Wealth Management Group, of Wells Fargo Advisors. The Parr McKnight Group
specializes in working with relief associations to help them formulate an investment policy
statement,manage and supervise their investments, receive on going trustee education and
assist in the reporting process. They currently work with 65 relief associations in the State.
The relief association has adopted an Investment Policy Statement for the investment for
our pension fund. Our target investment allocation is sixty percent in stocks, thirty-five
percent in bonds and five percent in cash. We rebalance to our target allocation annually.
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 which could lead to 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. Even with a 3.75%increase for 2015 we are projecting a
funding ratio over 110%.
Action Requested
Approve 3.75%benefit increase. This would change the yearly benefit level from $5167 to
$5360.
The Relief Association membership thanks the Council for its past and future support.
Member Count
Projected I...... Surplus/Def Funding Fully Benefit Change
Gain City C—trib. Required City C,Mrib.Date Assets Liabilities icit Ratio Non.vested Partially vested Vested ARi- Deferred Total Level Amnunt %Change
Al 5% $30,000 $0 12/31/2015 3,536,007 3,196,109 339,898 110.6% 30 21 12 43 3 46$ 5,425 $ 258 5.0%Estimate only
A2 5% $30,000 $0 12/31/2015 3,536,007 3,169,055 366,952 111.6% 10 21 12 43 3 46$ 5,375 $ 208 4.0%Estimate only
A3 5% $30,000 $0 12/31/2015 3,536,007 3,142,001 394,006 112.5% 10 21 12 43 3 46$ 5,325 $ 158 3.1%Estimate only
B 5% $30,000 $0 12/31/2014 3,208,293 2,836,316 371,977 113.1% 12 20 11 43 3 46$ 5,167 $ 76 1.5%Estimate only
C 5% $30,000 $0 12/31/2013 2,880,5]9 2,592,356 288,223 111.1% 4 21 10 35 3 38$ 5,091 0.0%Actual
D S% $30,000 $26,409 12/31/2012 2,456,311 2,551,430 (95,119) 96.3% 3 23 10 36 3 39 $ 5,091 0.0%Actual