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8.1. SR 07-20-2009REQUEST FOR ACTION To Item Number Ci Council 8.1. Agenda Section Meeting Date Prepared by Administration ul 20, 2008 Tim Simon, Finance Director Item Description Reviewed by 2010 Benefit Level for Elk River Fire Relief Association Reviewed by Action Requested The City Council is asked to consider no increase as requested by the Elk River Fire Relief Association and the benefit level per year of service will remain at $5,091 for 2010. Background/Discussion The Elk River Fire Relief Association, prior to August 1 of each year, is required to certify to the City the required municipal contribution for the following year. Also, a request for an increase in per year of service pension amount for the next year must be acted on by the Council before August 1. Given the current market conditions and funding ratio, the Elk River Fire Relief Association has requested no increase in benefit level for 2010. The Elk River Fire Relief Association has assumed a rate of return on investments of 15 percent for 2009. They felt the importance of limiting the impact on the City and allowing the market some time to recover. As of June 30, 2009 the rate of return on investments is approximately 7.76 percent. Relief association board members will be at the meeting to go over any questions the Council may have. Year 12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 Funded Rate 70.9% 114.7% 114.8% 105.9% 98.9% Financial Impact The proposed 2010 budget anticipated a voluntary contribution of $30,000 in the Fire Administration budget. The anticipated $30,000 budget amount will cover the required contribution in the amount of $28,516. Attachments • Memo from Elk River Fire Relief President Scott Schmitt • Statement of Position -Required Municipal Contributions to Volunteer Firefighters' Pension Plans Action Motion by Second by Vote FOllow Up S:\Council\Tim\2009\Fire relief benefit levels 07 20 09.doc ,L~11S, \~,,,~'~..- R.iver Fire Department July 20, 2009 To: Mayor and City Council From: Scott Schmitt, President of the Elk River Fire Department (FRED) Relief Association Back~ound 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 orpaid-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 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 City has also shown continued support of the Relief Association as exampled bypast contributions and the three year commitment of $30,000 commencing in 2008. State law requires that a relief association be governed by arsine-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. Twe of Pension Plan The members of the Relief Association are covered by a defined benefit plan. The yearly benefit level of the plan is determined bythe number of members, their length of service, and the value of the relief fund. Benefit level studies are performed on an annual basis and presented to members of the Association and the City Council for their approval, and then submitted to the State Auditor. Investments Approximately ninety-seven percent of the Relief's assets are invested in mutual funds with the State Board of Investment and American Funds. The Relief Association has engaged Mike Miller of Intergra Shield Financial Group as an investment professional to help guide our asset allocations and achieve our investment goals. 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 responsibilityto the membership is to seek the highest financially sound benefit level. The responsibility to the Council is to not expose the cityto any financial risk associated with 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. StrateQv The Relief Board values the long term support and working relationship with Council. We recognize that these are fiscally challenging times for the City. The Relief Board has considered a number of alternatives for mitigating a large mandatory city contribution. The annual State reporting schedules are. used to determine any mandatory city contributions. The formula used to calculate the City contribution uses some numbers that are historical and some that are projected. The 2009 investment gain is one of the numbers that is projected in the formula. C-ur investment gain as of June 30`i' is around seven to eight percent. The Relief Board unanimously voted to use a projected investment gain of fifteen percent for 2009. The fifteen percent investment gain produces a mandatory city contribution of $28,516 which is less than the budgeted contribution of $30,000. The current strategy summarized is: Position for a market rebound and eliminate a mandatory City contribution. Action Requested None: The Relief .Association membership thanks the Council for its past and future support. ~~"'~~"k ~ STATE OF MINNESOTA M1,h ~G R iii. t<q r~l "~- ~'~ OFFICE OF THE STATE AUDITOR ~}, - ~'~~~ ~ ~ ~ ~ = ~ SUITE 500 ~~ ~ 525 PARK STREET (65l) 296-2551 (Voice) REBECCA OTTO SAINT PAUL MN 55103-2139 (651) 296-4755 (Fax) state.auditor~state.mn.us (E-mail) STATE AUDITOR 1-800-627-3529 (Relay Service) Statement of Position Required Municipal Contributions to Volunteer Fireitighters' Pension Plans State law requires a municipality to pay a minimum annual contribution to the special fund of its affiliated volunteer fire relief association,l 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. 2 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. ' 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 year.5 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 1) 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.8 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). Reviewed: January 2009 Revised: NA 2009-2001