5.2. SR 07-12-1999
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Item #5.2.
River
MEMORANDUM
TO:
Mayor & City Council
-A~
FROM:
Lori Johnson, Finance Director
DATE:
July 12, 1999
SUBJECT: Fire Relief Association Benefit Level
Representatives from the Elk River Fire Relief Association will be present at
Monday's meeting to request an increase in the retirement fund's per year of
service benefit amount. The Council must take action on the Relief
Association's request before August 1. The benefit amount can only be
increased if the Council approves the increase or if the Relief Association is
funded at 110 percent. Attached are a memo from Relief Association
President Jim Nystrom, a summary of Benefit Projections, and an article
from the League of Minnesota Cities magazine highlighting the city's
. responsibilities as they relate to the Relief Association.
The Relief Association is requesting that the benefit increase from $2,900 per
year of service in 1999 to $3,370 per year of service in 2000. The Relief
Association is a defined benefit plan meaning that retirement payments are
based on a predetermined amount versus a defined contribution plan where
the retirement payments are based on assets available in the retirement
fund. As Jim stated in his memo, PERA and TRA are also defined benefit
plans; however, they are different from the Relief Association in that benefits
are determined based on each employee's individual earnings and PERA and
TRA require an employer contribution as set by the legislature. The city's
contribution to the Relief Association is determined each year based on the
benefit level requested and the assets available to meet the benefit liability.
The Relief Association's request does not require a city contribution in 2000.
.
Although a city contribution is not required this year, the city is ultimately
liable for any shortfall in assets available to meet benefit payments at the
level approved by the Council. It is unlikely that this would happen unless
there was a substantial loss in the value of the investment portfolio or a large
number of firefighters collected benefits in a very short time period. The
Relief Association has updated its investment policy and transferred much of
the portfolio to the State Board of Investments which has eliminated some of
the previous concerns relating to the types of investments and lack of
13065 Orono Parkway · P.O. Box 490 · Elk River, MN 55330 · TDD & Phone: (612) 441-7420 · Fax: (612) 441-7425
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diversity of investments held by the Association which may have increased
the risk of loss due to market fluctuations. The Relief Association has
experienced very good returns with the SBI. However, even though there is a
higher comfort level because a State agency is making closely monitored
investment decisions, that does not mean that the investments with the SBI
are not subject to the same market volatility as other investments.
Mayor Klinzing and I were at the last Relief Association meeting when the
benefit request was discussed and will be available to answer additional
questions you may have. Because most Council members are familiar with
this issue and have considerable background, I have provided only general
background information in this memo. If you would like additional
information prior to Monday's meeting, please contact me. As in the past, no
recommendation is being made on the requested increase. The Council has
had lengthy discussions on the benefit level in the past which have typically
resulted in approving benefit amounts which were lower than those
requested by the Relief Association.
Action Reauested
The council is asked to consider the Elk River Fire Relief Association's
request to increase benefits to $3,370 per year of service for 2000.
JUL-08-1999 THU 10:57 AM CRETEX PURCHASING
FAX NO, 6122418210
p, 02/12
. TO: Mayor and City Council
FROM: Jim Nystrom, President of the Elk River Fire Relief Association
BackWQ..lll1d oftlte A.~.fociati.fl!J.
The ERFD Relief Association is madc 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 memhers
or beneticiaries of members of the Association.
The State of Minnesota provides the basic fllnding for the Association through distribution of
money collected from a gross earnings tax on fire insurance premiums sold in the state. The
funds arc alloeatcd to all the departments throughout the State, based on the population and
property values in the area served by that department.
The ERFD Relief Association is directed by six trustees elected by members of the ERFD, the
11re chicf, the city Finance Director, and the Mayor. A minimum of four meetings are held each
year to oversee the management oft11,:: Association's funds.
.
Tvpe of Pension f/.Jm.
The members ofthc Relief Associalion arc covered by a defincd bencfit plan.. Our plan is the
sallle type as the Public Employees' Retirement Association (PERA) or thc Teachers' Retirement
Association (TRA), The yearly benefit level of the plan is determined by the number of
members and their length of service, and the value of the relief fund. The actuarial studies arc
per/armed on an annual b,lsis and presented to members of the Association and the City Council
for theIr approval, and submittcd to the State Auditor.
!:Jl.mpcm.\'ation Ta.~k Foret.
Several years ago, a task force, made up of the Mayor at that time, the City's Financial Director,
olong with four 111'e fighters, devdopcd a long term compensation plan for the fire department.
Thc plan included an hourly wage rate for paid on call firefighters based on education and
responsibility. The plan also included a scheduled yearly contribution to the Relief Association.
Prior to the cOll1p~nsation agreement, the City contributed to the Association on a year-to-year
rcq uest.
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JUL-08-1999 THU 10:57 AN CRETE X PURCHASING
FAX NO, 6122418210
p, 03/12
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Invesfll,l.r.u1.M.
The Association's state-aid allocation and city's contribution are invested in the Association's
Special Fund. The Association has developed an investment policy providing maximum retur.n
consistent with preservation of principal that follows State Statutes. In 1997, the Trustees of the
Association elected to invest all incoming funds with the State Board ofInvestment (SBI). (1)
011 February 25, 1999, the Trustees agreed to revise the Special Fund Allocation section of the
Association's Investment Policy to permit greater investment in stock mutual funds.(2) Based
on that ch..mge and the opportunity to simplify record keeping, all mutual funds, with the
exception of the Kemper I30nd Fund, were sold and the proceeds were reinvested with the SHY.
lhe Kemper Bond Fund will be llsed to pay the next three retirement payments. At that point, all
ofthc Special Fund will be invested in the SBl and a large CD at the Bank of Elk River.
P.J:..llP.JJ.JJJl
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The Association is requesting that the Council approve an increase of benefits [or the year 2000
to $3,370.00 for each year of service compured to $2,900.00 for 1999. Starting in 1996 and
continuing through 1998, the City's Audit has shown an increasingly larger surplus in the Special
Fund. 13y the end of 1998, the surplus had grown to $234,OOO,OO.(3) The increased surplus
means that the annual benefit rates have not been raised rapidly enough in the last several years,
Tn a business a surplus is considercd favorably, but ill a retirement fund, it is poor practice
because members can only receive benefits that have been approved by Council action and will
not receive additional (surplus) money they have earned.
Each year the Association verilies that the proposed increase can be maintained in the future with
a multi-year projection of income and costs. This years projection indicates sufficient new
income to permit approximately a 10 percent annual increase for the next Jive years.
Attachment (.1)
Minnesota State Board of Investment
1998 Annual Report Pgs. 23 - 27 & 29
Attachmcnt (2)
Elk River Fire Department Relief Association Investment Policy
Section 12.1 Rev. 2/2/5/99
At1achmcnt (3)
Elk River Fire Department Relief Association Annual Report, 1998
Pgs. 8 & 9, ABDO, ARDO, Eick & Meyers
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FAX NO. 6122418210
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JUL-08-1999 THU 10:58 AM CRETEX PURCHASING
Supplemental Investment Fund
The Supplemental Investment Fund is a multi-purpose investment
program that oiters a ranga of investment options to state and local
public employees. The Fund servas more than 36]000 individuals
who partieipala in defined contribution or supplemental retirement
savings plans. On June 30] 1998] the mar.l(et value of the entirs Fund
was $1.25 bi/lion.
The diflcrcnt participatins s:roups
use the Supplemental Fund for a
v<ll'iety of purposes:
It functions as the sole
investment manager for nil
assets of the Unclassified
Employees Re(ir~mel\l Plan,
Public Employees Ddined
Contribution Pl:l.I1 and Hennepin
County Supplemental
Retirement Plan.
I( is one investmerlt vehicle
oCrcretl to public employees as
palt ofth~ stale's Dderrcd
Compensation Plan, as well a'i
the Individual Retirement
Account Plan and College
Supplemental Retirement Plnn
offered by Minnesota Srate
Colleges and Universities
(MnSCU).
/''''~.'''-''-- ..._H.,....____
(-It serves :IS an external ~y
mal1<lger for a poriion of some
local police and tire tighter
'". retirement plans.
~''''' -
..-.----.-----............
!...
Fund Slructura
10
A witle diversity of investment goals
exists among (he Supplemental
Funu's participants. In order to meet
those needs, the Supplemental Fund
has been structured much like 3
"family ofmutu:.\1 funds."
Participants rn::!y allocate their
inv\:stmcnt:s among Oll~ or more
accounts lh:.\t arc appropriate for their
needs, within statutory requirements
and rules cstllblishcd by the
~
parlicipating organii:ations.
Pati icipll.tion in the Supplemental
fund is accomplished through the
purchase or sale of shares in each
account
Fund Management
The Supplemental Fund otTers seven
different investment options (See
Figure 23). The objectives, asset
<l11ocation, management and
pert"orm<lllCe of each ilCCO\1nt in the
Fund are explained in the following
sections.
Share Values
Each account in the Supplemental
fund establishes a share value and
participants may bu)' or sell shares
monlhly, based on the most recent
share V.\lllC.
In the Income Share Account, the
Growth Share Account, the Common
Stock Index Account, the
International Share Account and the
Bond Market Account, shares arc
priced monthly based on the market
value of each account. Individuals
measure thc performance of these
accounts by changes in share values,
which in turn are ;:\ function of the
income and capitalapprccimion (or
depreciation) generated by lhe
securities in the accounts.
In the Money Market ^ccount and
the Fixed Interest Account, share
values remain constant and the
accrued interest income is credited to
the accounts lhrough the purchase of
additional shares at predetermined
intervals.
Figure 23. Accourlts ill lite Suppletneflt'lllllveSlml!llt/;'ulld
ACCOW-'T~ I":} Cr'l-\= u ~fecr~ (,. ~lJl.{l
-J. Income SharD
.., Growth Share L
a balanced portfolio of stocks and bonds
a 1'0 11 folio ofaclively and semi'passively
m~l1llgcd cOlTlmon stock$
~ Common Srock Index
International Share
:\ p~ssivcly managed l:Onlmon stocl.: portfolio
~ porlfolio of bOlh "clively .lI1d p,\ssivdy m:m<lged
non U.S. stocks
~ Bond Market
a fixed income portfolio utilizing ~\eti...c nnd semi.
passive management
Money Market
a P011folio of liquid. shorHCI1l\ debt ~ecul'ities
Fixed Interest
a pol'tl'olio (lr GlIaranh:cd ilw,:slmcnl C(llllr:lcl~ (GIC'~)
anJ (jIC lypc ilwc$lrtlcnlS
23
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JUL-08-1999 THU 10:58 AM CRETEX PURCHASING
FAX NO, 6122418210
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SuppJementallnvestment Fund
The investment returns shown in (his
report are calculared lIsing a lime-
weighted rate of return formula.
Thcse rcturns arc net of in....cstment
manflge1l7ent lees and transact ion
costs. They do /lot, however. reflecl
any asset-based charge. deducted by
the l'utiremenl Jystf!ms to df!ji'oy their
own admini.~trativl! COSts.
The dislribution of a.~sets in the
SllpplementallnvC~lment 1:\Ind as of
June 30, 1998 is shown by Account
in Figure 24 and by Plan in Figure
25.
I-'igll~a :14. Composilir)l/ h); Accolll1/ I2S of }/"II: 30. 1998
FiglJI"e 25. Porticip(ll;onh.y Pla/ICIS of JzmdO. /998
it{
IncomeShq(e- 46.1%
Growth Share. 22 3%
Common Stock - 17.0%
Unclassified Retirement Plan - 18.3%
PERA Defined Contribution - , .0%
MnSCU . 22.2%
Deferred Compensation. 43.7%
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JUL-08-1999 THU 10:59 AM CRETEX PURCHASING
Objective
The Income Sh:lrc ACCOLlnt
resembles the Basic and Post
Retiremcnt Funds in terms of
investment objectivcs. The Account
seeks to mnximi7.c long-tcnn
innmion-adj\lsred rates of return. The
Incomc Share Account pursues this /lIdivilllllll Mllllnger. The
objective within the constraints of pnssive .~t()ck manager is
protecting against adverse financial expected to track closely the
environments nnd limiting shorr run performance of the Wilshire
p(1rtl:Olio ~~~,~\rrLyolatili~....__" 5000. The internal bond
.' "' manager for the Account is
"Tll;'S~~'il1ve:;t~ the Income s~ar~ expected to exceed the
l Account in a bal,mced po\tf()lio of"\ performance of the Lehman
common stocks and fixed income ...... '. ...... Brothers Aggregate BOlld Index.
5ccuritics with the following long- . '..... ....'..-...."_ ,'__
term ,1:;SC[ mix: 60% domestic ? ft(ll1 ([ ~-S E It r fJ it- A. $ ~
stocks, 35% bonds, 5% cash I N 1J6Tnt:;~igrlr~ 26. Income SharI! AC'collntFY /994-/998
. I /
,~Iva ents. 1> 0 t.-l (, ,- .../~
'....,....~..... . ... ..-., . . .25 ....,~.
Common stockS-p~Q'vidc"thcp-(iicntjal . "-"'. ..... .., ."
for signiticant long-tcnll capital r'.1i"corre-"-"
::l.pprcciation, while bonds provide Share
both <l hedge against deflation <lnd IOCorrpoSitC.
the diversification needed [0 limit J
excessive portfolio return volatility. I ...-------
Supplemental Investment Fund
Income Share Account
At the close of fiscal year 1998, the
value of the Income Sh,m:l Account
was $575 million.
Management
The Income Share Account's
investment management Slructure
combines internal and external
m::magcmcnt. soi staff manage thc
I1xcd income segment. The common
slock segment is mallnged externally
as part of a passively managed index
fund designed to track the Willihire .
5000. Since July 1995, the manager
for thi~ portion of the Account has
been Barclays Globnl Investors.
Performance
Similar to the other S9I funds which
utilize a multi-manager investment
structure, the Board evaluares the
performance of the Income Share
Accollnt 011 two levels:
FAX NQ 6122418210
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?tZ. /rn rI't"Z- Y /tec. D c~ IV r
TOf,,1 Accmmf. Thc Income
Sharc Account is expected to
exceed the returns of a
composite of marl<c:t indices
weighted in the same proportion
as its long term asset allocmion.
The Tnc()lne Share Account provided
a return of 21.7% for fiscal year
1998, outperforming its composite
index. Over the most recent fiye
years, the Income Share Account has
also exceeded its composite, Figure
26 shows n five year history of
pcrformance results.
c
~
III
Cl.
15 _,. _. _..
10 ......._
0
1994 1995 1996 1997 1998 3Yr. 5Yr,
Annulllized
1994 1995 1996 1997 1998 J Yr. 5 Yr.
Income Share 1.2% 19.3% 17.6% 21..40/0 21.7% 20.2% 16,0%
Composite. 0.4 19.4 17.4 20.5 21.2 19.7 15.5
*60% Wilshin: 5000/35% Lehman Brolhl:rs Aggregnte Bond Indr::oI.1
5% 90-Day T-Bill Composill.:. Prior to 7/1194, the Salomon I3roalJ Inveslment
Grade Bond Index W:lS llsed:ls;1 component of the Comp~~sile.
25
FAX NO. 6122418210
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JUL-08-1999 THU 10:59 AM CRETEX PURCHASING
Supplemental Investment Fund
.
Growth Shaff.~ Account
Objective
The Goard has established above-
average capital appreciation as the
primnr)' investment objective of the
Growth Share Account. To achieve
this objective, the Account maintains
an exposure to U.S. common stocks.
At the close of lisen I year 1998, the
v<llue of the Growth Share Account
was $278 million.
.
Management
The assets of the Growth Share
Account are invested by the external
active and semi-passive rnanagers.
This allocation reflects a more
aggressive invesrment than is
ilvailablc throush passive
!11:lnacement. Since July 1997, these
assets have been managed by the
same active and semi-pnssivc
managers utilized by the Basic and
Post Retirernent Funds in the
Domestic Stock Pool. (Prior to July
1997, the Account used only active
managers.)
Performance
Like the Incomc Share ACC(lUnt, the
Board evaluates the pCrfOl1l1anCe of
the Growth Share Account on two
levels:
Total A ceo 11111. The Growth
ShClre Account is expected to
exceed the rctulllS of the
Wilshire 5000.
/l/llil'irJlUll Mlllluger.
Performance objectives for thc
individu.ll managers arc
described ill the Investment
Pool section.
.
The Growth Share Account provided
a retum of 31.2% for the tiscal year,
olllperfon11ing its composite index by
2.3 percentage points. Over the most
recent five years, the Account has
-#1
exceeded its compositc index by 0.2
percentage point annually.
A five year history of perfomHmce '
results is shown in Figure 27.
Figu!'€! 27. Graw/IT Share Accollnt FY 199~-J998
35
. Growth
Share
o Composite"
30...------........-..:,--
25 . - . - . . . - . . . - r- . .
....
f-
1
._. ..._ .1
C; 20
CIJ
~
~ 15
,.....
10
5.
o " .---,
1994
-L....;- -L+- '-'-+- .... - '- -I- '-
1995 1996 1997 1998 3 Yr, 5 Yr.
Annualized
1994 1995 1996 1997 1998 3 Yr. S Yr.
Growth Shan' 0.6% 23.3% 24.6% 29.5% 31.2 % 28.4% 21.3%
Compositc. 1.2 23.7 25,1 29.2 28,9 27.7 21.1
· 95% WiL,hil'c 5000/5% T.BiII Composite Ihrough October 1996,
100% Wilshirc 5000 since Novcmber 1996,
26
JUL-08-1999 THU 10:59 AM CRETE X PURCHASING
Supplemental Investment Fund
Common Stock
Index Account
Objective
The investment objective oflhe
Common Stock Index Account is to
generah: returns that tmck the
performance of the entire U.S.
commOIl stock market, "s representcd
. by the Wilshire SOOO. To accomplish
this objective. the SBI allocatcs all of
thc Common Stock Index Account's
ilsscts to passively managed domestic
stocks. At the cnd of fisc::J.1 year
1998, it ha.d a market value of $212
111 ill ion.
Management
Since July 1, 1995, the Account has
been managed by Dnrclays Global
Investors.
Performance
The performance objective ofthe
Common Stock Index Account is to
track the perfonnance orlh~ Wilshire
5000. The SGI recognizes that the
Account's returns may deviate
slightly from those of the Wilshire
SOOO uue to the effects of
man~gemcnt fees, timing of new
contributions and tracking error.
During fiscnl year 1998. the
Common Stock Index Account.
produced a return of29,4%, which
was 0.5 percentage point above the
Wilshire 5000. Over the most recent
five years, the Account h<ls e:<cecdcd
its index by 0.3 percentage point
annualized. Tot::!1 Account results for
the last five years nre shown in
FiSlIrc 28.
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~l
f;gu'a 18. CommoJl Slock Index "'COlin! FY 199././1}1)8
35
.Stock 30
Index
DWilshirc 25
SOOO
C 20
lS
ai 15
c..
10
5
0
Stock Intlcs.
Wilshire SOOO
. . - - - - . . . . . . . - . --- . . . . . . . .
,..
. . . - - "" . . . . . . .
. . . . - - . . -
. . . . . . - . .
. . . . . . . . -
. . . . . - . . .
..... '--
1994 1995 1996 1997 1998 3 Yr. 5 Yr.
Annu:alized
1994 1995 1996 1991 1998 3 Yr. 5 Yr.
2.2% 24.3% 25.5% 29.9% 19.4% 28.2% 21.8%
1.0 24.1 26.2 29.) 28.9 28.1 21.5
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JUL-08-1999 THU 11:00 AM CRETEX PURCHASING
Supplemental Investment Fund
Bond Market
Account
Objective
The Bond Market Account is
invested pl'imnrily in jnvestll1~nt.
graue government bonds, corporate
bonds and mortgage sccurities with
intermediate to long matl.lritii:s. As
sllch, it is a more conservative
investmcnt alternnrive than any of the
accounts described in the previolls
sections. At the end of fisci'll year
1998, the market vnlue of the
ACCOUIH was $35 million.
The Account earns investment
returns through interest income and
capital apprecialion. Because bond
prices move inversely with intcrest
rales, the Account entails some ri;;k
for inVeSlQrs. However, historically,
it represents a lower risk alternative
thnn the investment options that
include common stocks.
Management
Since July 1997, the structure ofrhe
Bond Market Accotlnt has included
active Clnd semi.pa;;sive managers
and has mirrored the structure of the
Bond Pool utilized by the Basic and
Post F\lnds. (Prior to July 1997, the
Bond Market Account used only
active managcrs.)
Performance
The Bond M<lrket ACcount is
expected to exceed the performance
OfLhc bond market, as represented by
the Lehman Brothers Aggregate
Bond Index. for fiscal year 1993, the
Accoullt outperfomled by 0.5
percenTage point. For the lT10~t recent
five years. the Account h:u
omperformed by 0.3 percentage
point annllalized.
Total Account rcsults for the last five
years are shown in Figmc 30.
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Figure Jfl. HondA1arkct A~"COWll FY 1994./998
I.Bond !
I Market.
I .
: 0 Lehman /13
i Agg.- ~
'_...___._._1 rf
1S.
I-
10 ...-
~ ....-....
....
-
JJ
5 ".."
.Il"
.I.U +- +-
+-
o 'IJ"+
.5.
1994 1995 1995 1997 1998 3 Yr. 5 Yr.
Annualized
" 1994 1995 1996 1991 1998 3 Yr. 5 Yr.
Bond M:lrk.:lI -1.7% 12J~% 5.3% 9.3% 11.0% 8.5% 7.2%
Lchm.ln Aggn:gall:* -1.2 12.5 5.0 8.2 10.5 7.9 6.9
· Lehman Brothers Aggregate Bond rndcx. Prior to 7/1/94 the Salomon Broad
Investment Grade Bond Indcx was the benchmark.
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JUL-08-1999 THU 11:00 AM CRETEX PURCHASING
12. DIVERSIFICA TIONIMA TURITlES
The ERFDRA portfolio will consist of a diverse range of investments which will be held
until maturity unless an emergency or other situation arises in which it would be in the best
interest ofERFDY A to sell an investment prior to maturity.
....._---1-.'-.,..-.-.-.__ _ ._.._____, ........_.
.~.... ........... .--. --=::::0:.......__.-
/'/'12.1 SPECIAL FUND ALLOCA TrONS ." ..- -. -...... ------.....
//- Funds will be invested using the following guidelines: ...............
· A minimum of 25% and a maximum of 50% in non-fluctuating share value
investments. At least $50,000 should be in a savings, money market or othe
liquid cash account.
· Zero to 60% in bond mutual funds.
· Zero to 60% in stock mutual funds of which no more than 35% may be
invested in stock mutual funds which are not managed by the State aoard of
Investment.
· Zero to 5% in real estate funds.
""
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ERFDRA. All financial institutions shall agree to undertake reasonable efforts to preclude
ir?prudent transactions involving the ERFDRA's funds. .
11. INSTRUMENTS
Appendix A provides a listing of investments pennissible by Minnesota Statutes for relief
assodations.' . .
ERFDRA will not invest in any mortgage or mortgage related security unless a return of
principal is completely guaranteed by a federal entity.
. .
0.,,, /..
.~, .
12."2-~MATURtTY CONSIDERATIONS /...-/
In establishrnga-sp-etific-diversification"strategy,-the- foUowing..gener.al,palicies 'and
constraints shaH apply:
Portfolio maturities shall be staggered to avoid undue concentration of assets
in a specific maturity sector. The maturities selected shall provide for stability
of income and reasonable liquidity.
Section 12.1 revised FebruaIy 25, 1999.
s:\fulatlcc\frinvpol. doc
3
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Note 3:
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Note 4:
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JUL-08-1999 THU 11:00 AM CRETEX PURCHASING FAX NO, 6122418210
^ 11 J4Crl VVt v-.rrp
ELK RIVER FIRE DEPARTMENT RELIEF ASSOCIATION
ELK RIVER, MINNESOTA
NOTES TO FINANCIAL 5T A TEMENTS
DECEMBER 31, 1998
FUNDING STATUS AND PROGRESS
p, 11/12
.5
Presented below is the total pension benefit obligation of the Elk River Fire Department Relief Association. The
amount of the total pension benefit obligation is based on a standardized measurement established by the
Govel1lmcntal Accounting Standards Board (GASB) that, with some exceptions, must be used by the relief
associations for financial statement presentation. "hc standardized measurement is the actuarial present vallie of
credited projected benefits. This pension valuation method reflects the present vallie of estimated pension benetits
that will be paid in future years as a result of employee services perfomled to date. ^ standardized measure of the
pension benefit obligation was adopted by GASa to enable the readers ofreliefassociation financial statemCI1!S to (a)
assess the reliefassoeiation's funding status on a going-concern basis, (b) assess progress being made in
accumulating sufficient assets to pay benefits when due, and (e) make comparisons among rclief associations.
Because the standardized measure is used only for disclosure purposes by the Elk River Fire Department Relief
Association, the measurement is independent of the actuarial computation made to determine contributions to the
Relief Association.
The standardized measure of the funded pension benefit obligation as of December 31, 1998 is:
Pension Benefit Obligation
Retirees and beneficiaries currently receiving benefits and
terminated employees not yet receiving benefits
Current members
Vested benefits
Non-vested members
$ 77,436
Total pension benefit obligation
Net assets available for benefits, at market
1,054,679
23.852
1,155,967 .
1.390.291 .-
_.-------
C ~~4.32~)
Net assets ill excess of pension benefit obligation
The total pension benefit obligation as of December 31, 1997 was $1,088,123. During the year, the plan experienced
an increase of $67,844 or 6.2% in the pension benefit obligation. The current benefit level as of December 31, 1998
is $2,<i74. The benefit level was increased to $2,900 effective for 1999. This resulted in an increase in pension
benefit obligation of $89,589.
The financial requirements of the Special Fund are determined in accordance with Section 69.772 of the Minnesota
Statutes, which requires the payment of pension benefits in a lump sum or optionally in annual installments. The
Association benefits arc payable in a lump sum after age SO, 20 years of service or upon death. Benefits are
accumulated at $2,674 and $2,500 per year of active service for 1998 and 1997, respectively. The accI:Ucd liability
for these accumulated benefits is computed using increasing percentages based on years of service in accordance
~ith subdivision 2 of Section 69.772, At 20 years of service, the liability is equal to the number of years of service
times benefits per year. Association members are vested after 5 years.
CONTRIBUTIONS REQUIRED AND CONTRIBUTIONS MADE
The total contribution, which was not acruarially dcterm ined, in 1998 amounted to $79,502 of which $20.1 SO was
contributed by a City tax levy and $59,325 was from State of Minnesota Aid.
JUL-08-1999 THU 11:01 AM CRETEX PURCHASING
FAX NO, 6122418210
p, 12/12
:fl >
.
ELK RIVER FIRE DEPARTMENT RELIEF ASSOCIATION
ELK RlVER, MINNESOTA
REQUIRED lIISTORICAL TREND INFORMATION
DECEMBER 31, 1998
Historical trend information related to the pension plan is presented here. The infonnation is presented to en<lble the
reader to assess the progress made by the Relief Association in accumulating sufficient assets to pay pension benefits
as they become due.
This information is intended to help readers of the financial statements assess the Relief Association's funding status
on a going-concern basis, assess progress made in accumulating assets to pay benefits when due, and make
comparisons with other reliefussociations.
Funded
(Unfunded)
Net Assets Pension Pension
Available Benefit Percentage Benefit
for Benefits Obli"ation Funded ObIilZation
1998 $ 1,390,291 $ 1,IS5,967 120.3~ -;-234,324 =:J
1997 1,192,103 1,088,123 109. Yo 103,980
1996 ],001,056 953,938 104. - 47,118
1995 895,562 906,891 98.8 ...-.- =T:m1
1994 759,890 779,372 91.5. (19,482)
1993 764.918 763,098 100.2 1,820
. ]992 658,625 636.918 103.4 21,707
1991 568,624 S67,949 ]00,1 675
1990 475,001 553,039 85.9. (78,038)
1989 466,410 49'.085 93.8 (30,675 )
Revenue bv Source Expenses by Type
City. State
and Other Investment Other Benefit Administrative
Contribution Income Income Payments Expenses
1998 $ 79.502 $ 120,631 (I) $ $. $ 1,945
1997 90,308 103,056 (2) 2,317
1996 73,630 60,923 Pl 26,850 2,209
1995 43,754 93,246 (~l 1.328
1994 60,526 19,402 82,400 2,556
1993 57,514 48,449 2,816 2.486
1992 58,590 33,450 506 2,545
1991 60,907 39,373 33,295 38,00l} 1,767
1990 56,321 33,357 (8,374 ) 70,200 ' 1,563
1989 51,297 32,358 13,672 38,500 1,225
.9~
~
(4)
Includes increase in market value of $45,121.
Includes increase in market value of$14,698.
Includes decrease in market value of $7,569.
Includes increase in market value of $45,354.
.
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t-
GOVERNING YOUR CITY
How's Your Fire Relief Association?
hen asked about the local
volunteer fire relief associa-
tion, many city officials
simply shrug their shoulders.
The day-to-day operations
of the association are ably
handled by the firefighters.
Much of the city's annual
financial obligations to the fund are
covered by state aid. Pension and
investment issues confuse many
people and bore others to tears.
The financial health of your
local fire relief association fund is
just as important to your city budget
as it is to your volunteer, firefighters.
~While having a volunteer, rather
than a full-time, fire department may
fford substantial savings, your city is
ltimately responsible for the cost of
supporting the local relief association.
~d, if you are an ex-officio trustee,
you have a fiduciary responsibility to
the fund and can be held personally
liable for the decisions of the board.
In most cases the mayor, the clerk,
and the fire chief are ex officio
members of the relief association
board of trustees. They have full
voting powers but cannot be officers
of the association. Trustees also have a
statutory obligation' to make reasonable
efforts to obtain the necessary skills and
knowledge to carry out their duties.
Measuringfinancial health. The
relief association fund's annual financial
requirement is calculated by making
estimates of future pensions that the
fund is obligated to pay to volunteers
and the value of assets in the fund
(contributions to the fund plus invest-
ment returns). If state aid does not
cover the annual financial requirement
for the fund, your city must levy for
the difference.
Many factors determine the financial
health of the relief association and the
need for city contributions including
member benefits, state aid payments,
and investment returns. Member
SEPTEMBER 1998
By Eric Willette
benefits are the value of pensions
promised to past and current volun-
teers. When setting benefit levels,
trustees should consider the depart-
ment's need to attract and retain
volunteers, as well as how much the
fund and the city can afford to pay
out in the long term. If the promised
benefits exceed available revenues,
the city obligation could increase or
a long-term deficit could be created.
Similarly, the city obligation could
increase if current state fire aid is cut or
does not grow with benefit increases.
While state fire aid has been relatively
stable over the past few years, some
legislators are interested in cutting
this and other pension-related aid
programs.
Finally, the returns on the fund's
investments can dramatically affect the
financial health of the fund and the
need for municipal contributions to
cover expected payments. In 'fact, the
investment returns realized by local
funds over the past few years are one
reason state fire aid is being scrutinized.
Some critics, including a few legisla-
tors, believe many local funds' invest-
ment strategies are too conservative
or too risky. They believe if state
aids are cut and more of the annual
financial requirement is paid locally,
trustees will have a greater incentive
to maximize investment returns
without undue risk. They conclude
that greater investment returns could
lead to higher benefit levels at a
reduced cost to both the state and
the city.
Investment policy must be prudent.
State law requires associations to have
a written policy that spells out its
investment strategy. This policy guides
the fund's asset allocation; that is, how
investments are divided among bonds,
domestic stocks, international funds,
and other types of investment.
When setting the investment policy
and in performing all other association
MINNESOTA CITIES
duties, trustees are required by statute
to follow the prudent person standard.
The statute states trustees must: "act
in good faith and shall exercise that
degree of judgement and care, under
the circumstances then prevailing, that
persons of prudence, discretion, and
intelligence would exercise in the
management of their own affairs, not
for speculation, considering the
probable safety of the plan capital as
well as the probable investment return
to be derived from the assets." Not
surprisingly, there is wide variation in
interpretation of what constitutes a
prudent investment policy.
Recent legislative scrutiny has
compared the investment returns of
local associations to the returns of the
professionally-managed state plans and
the state board of investment. Some
legislators think many associations that
invest more money in bonds than
stocks, for example, are too conserva-
tive in their investment decisions.
Legislative proposals for increasing
local investment returns include
encouraging more fund investment
through professional money managers,
encouraging or requiring local fund
investment through the state board of
investment, and setting up a voluntary,
independent investment board for local
funds.
Ex officio trustees must be involved.
Whatever your trustees adopt as
prudent investment policy and benefit
levels for your association, it is vital that
your ex officio trustees are involved in
the decisions. Remember, any financial
shortfall experienced by the fund falls
back on the local property taxpayers.
And, all trustees can be held individu-
ally liable for a breach of fiduciary
responsibility by the board, even if they
are not actively involved. I'"
Eric Willette is legislative policy analyst
with the League oj Minnesota Cities.
35