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8.1. SR 07-06-2015 ��i Eof lk — - Request for Action River To Item Number Mayor and City Council 8.1 Agenda Section Meeting Date Prepared by General Business July 6, 2015 Tim Simon, Finance Director Item Description Reviewed by 2016 Benefit Level for Elk River Fire Relief Cal Portner, City Administrator Association Reviewed by Action Requested Approve,by motion,an increase for the Elk River Fire Relief Association (ERFRA) benefit to $5,510 per year of service effective January 1, 2016. Background/Discussion Prior to August 1 of each year,the ERFRA 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 ERFRA 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. On June 1,the association recommended an increase of 2.80%, or $150 from the current benefit level of $5,360 which was last approved effective January 1,2015. The new rate of$5,510 would be effective January 1, 2016 and does not require a city contribution for 2016. Over the past few years the relief assets have climbed back to a funding level over 110% (actual funding ratio 113% as of 12/31/14). A combination of investment returns,planning, and increases in State Fire Aid have helped with the recovery. The Board 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. Association projections indicate that based on a 5%return the funding ratio remains over 110%if this increase is approved. The year-to-date returns are 1.1 percent (May 31) and over the past five years the plan has averaged 7.32% return on investments. The assets are managed under The Parr McKnight Wealth Management Group of Wells Fargo. P0WIAIa 9r Template Updated 4/14 IN"AfURE] 20.0% Investment Rates of Return 13.6% 15.0% 9.0% 10.0% 8.0% 4.1% 5.0% -1.9% 1.1% 0.0% -:1 1 -5.0% 2010 2011 2012 2013 2014 YTD(5/31) Source:Elk River Fire Relief Association Management Letter 12/31/2014 Mayor Dietz, Fire Chief John Cunningham,and I serve as trustees of the Association. Financial Impact The annual voluntary contribution of$30,000 is planned to be budgeted in 2016 in the Fire Administration budget. Attachments • Memo from President of the Elk River Fire Relief Association N:\Public Bodies\Agenda Packets\07-06-2015\Final\x8.1 sr Fire Relief Pension.docx City Elk Rive Fire Department June 30, 2015 To: Mayor and City Council From: Scott Schmitt,President of the Elk River Fire Department (ERFD) Relief Association Backgound 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 2.80% increase effective January 1, 2016. The per year benefit level would go from $5,360 to $5,510. Investments Over 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 2.80% increase for 2016 we are projecting a funding ratio over 110%. Actuarial Studv In 2015, the Fire Relief adopted the new accounting Governmental Accounting Standard Board (GASB) Statement No. 67 for the December 31, 2014 financial statements. This required the Fire Relief to have an actuarial study done on our relief association assets and liabilities. The actuarial study per GASB direction calculates funding differently and the good news is that they are showing the relief at 143% funded. We have decided to stay with the more conservative state formula when looking at possible increases. Action Requested Approve 2.80% benefit increase. This would change the yearly benefit level from $5,360 to $5,510. After this increase, our projections indicate assets will be over 110% funded. The Relief Association membership thanks the Council for its past and future support.