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5.3. SR 05-11-2009Item # 5.3. ,It1~.~ , .River MEMORANDUM TO: Mayor and City Council FROM: Tim Simon, Finance Director DATE: May 11, 2009 SUBJECT: Elk River Fire Relief Association Update The Elk River Fire Relief Association is made up of forty active paid-on-call firefighters. The Relief maintains a Defined Benefit Plan (Lump Sum) pension plan. The calculation fox the lump sum payout is the product of years of service and the current benefit level. A firefighter retiring with less than twenty years of service has the amount reduced by a vesting percentage. The Relief Association maintains investments with the State Board of Investment and American Funds mutual funds. The Relief Association works with Mike Miller, Certified Financial Planner, on ongoing asset allocation and investment decisions. Members of the Association will provide some background information and up-to-date investment returns at the council meeting. As you recall, each July per Minnesota statutes the Relief Association must get approval from the City Council for any benefit level change for the following calendar year. Attachment Statement of position -Required Municipal Contributions to Volunteer Firefighters' Pension Plans ~`"`~"k %~~ STATE OF MINNESOTA .~ ~~ ~ ~. -~ ~.:_~';~,_ OFFICE OF THE STATE AUDITOR ~. ~: 'rl'~ '' ~ .~° sU>•TE soo ~:-~.~ s~ 525 PARK STREET (651)296-2551 (Voice) REBECCA OTTO SAINT PAUL MN 55103-2139 (651) 296-4755 (Fax) state.auditor@state.mn.us (E-mail) STATE AUDITOR 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.2 The special fund is a fund established and maintained within a relief association to pay service pensions to retiring members. A fund 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.3 Lump Sum Plans For lump sum plans, the minimum required municipal contribution equals the financial requirements of the special fund minus 1) 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.4 ' State law has been summarized and simplified. Minnesota Statutes should be consulted before making decisions based on this Statement. The Statement does not contain legal advice and it should not be relied upon in lieu of legal advice. It is subject to revision at any time. z 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. 3 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. a Minn. Stat. § 69.772, subd. 3(d). Reviewed: January 2009 2009-2001 Revised: NA 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 years 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 I) 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. Monthly Service Pension Plans For monthly service pension plans, the financial requirements of the special fund are based on the most recent actuarial valuation. 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 change. If the plan is in deficit, the deficit is amortized over twenty years and will be included in the annual municipal contribution. 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 if it chooses. 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 s 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 2008 Schedule Form will calculate the required municipal contribution amount for the year 2009. e 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: January 2009 2 2009-2001 Revised: NA 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 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 level where full funding is achieved. 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). 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