08/25/1980 - City Council Finance Committee MEMO TO: FINANCE COMMITTEE MEMBERS
FROM: CITY ADMINISTRATOR HEDGES
DATE: AUGUST 25, 1980
SUBJECT: FIREMEN'S RELIEF ASSOCIATION PENSION
At your request, I have attempted to answer some of the questions raised as
a result of t ,e new fire relief legislation. The Director of Finance has met
with Larry Martin, Executive Secretary of the Legislative Commission on Pensions
and Retirement for the State of Minnesota, and has discussed this subject with
him. The following is the information learned by Gene as a result of the
meeting:
The State Legislature in 1979 addressed two (2) separate issues in
regard to pensions. First, the statutory dollar maximum on volunteer
fire fighters service pensions was replaced by the liberal flexible
limit based on current (latest three year average) funding going into
the relief association. The old method was satisfactory for about
80% of the associations because limits were well above what they could
afford to pay or above what they cared to pay. The other 20% granted
increases above this general, statutory maximum through the use of
special legislation. The old volunteer guidelines act and the new
flexible limits legislation are intended to compliment each other.
The guidelines act essentially says that if you promise it (benefit
level) , you have to pay for it. The flexible limits legislation puts
a limit on what you can promise in any one year and is designed to
keep cities from getting in trouble in any one year. It is still very
easy to get into trouble over a period of five to six years as the
example in Stan Peskar' s memo of July 23, 1980. All of this attention,
of course, attempts to insure that contributions match benefits.
The second pension area which is more pertinent to the question raised
at a previous meeting regards what to do with the new "share the pot"
or "defined contribution" type plan. The legislature legitimized an
approach which was being used in a number of cities without specific
authorization. There are basically two (2) approaches to benefit plans.
In the first, known as "defined benefit", the level of benefits is
fixed and the contribution is variable and determined by actualarial
studies. In the second, known as "defined contribution", the level
of the City contribution is set and the benefit level is variable based
on fund performance. The League of Minnesota Cities has put several
advantages to the "defined contribution" plan, including the fact that
they are always fully funded and there can be no manipulation of the
benefit structure. This is more of a pay as you go plan, and future
generations of tax payers are protected from unexpected payments for
services rendered long ago. Cities are consequently responsible for
making the annual contribution and for the assets of the fund but not
for additional liabilities.
MEMO TO: FINANCE COMMITTEE MEMBERS
FROM: CITY ADMINISTRATOR HEDGES
DATE: AUGUST 25, 1980
SUBJECT: FINANCE COMMITTEE MEETING/FIREMEN'S RELIEF ASSOCIATION PENSION
DISCUSSION — AUGUST 27, 1980
A meeting has been confirmed for 7:00 p.m. Wednesday, August 27, 1980 at Fire
Station #1 to discuss an alternate pension program for the Firemen's Relief
Association.
Attached is a memorandum which includes much of the findings that our Director
of Finance, Gene VanOverbeke, made during his review of various pension programs
in the State of Minnesota and also in a discussion with Larry Martin, Executive
Secretary of the Legislative Commission on Pensions and Retirement for the State
of Minnesota.
If any additional information is required prior to the meeting on Wednesday
night , please feel free to contact me and I will make every effort- to have the
information available for you.
qt0144,0
City Administrator
Firemen' s Relief Association Pension Memo
August 25, 1980
Page Two
Eagan' s present plan, including monthly as well as lump sum payments,
makes conversion to any new system quite complicated. This is further
complicated by disability and death benefits. Eagan' s benefit plan
is more sophisticated than most and is not as readily convertible as
the simple lump sum plan would be.
The unfunded liability should be addressed in negotiations with the
relief association. The City is obligated by State law to amortize
the present deficit over f'_.^Lure years. Presumably, the association
could negotiate part or all of this away in return for other
considerations. However, to give them only present assets effectively
reduces their benefits and would probably not be too attractive. This
could probably be addressed through a different funding level which
would be at a higher rate for the first few years. It also appears
that the legislature would like volunteer fire funds to remove them-
selves from casulty types of benefits such as survivor and disability
where benefits are paid before ordinary retirement. These coverages
would be better provided directly by the City through an insurance
carrier rather than relief association. In this "defined contribution"
plan, it would also be best if the association paid only lump sum
pensions and provided "roll over" options to convert them to monthly
annuities through insurance companies.
Mr. Martin has suggested that the Director of Finance contact the cities of
Hopkins, Bemidji, Cannon Falls, Baudette, Redwood Falls or Rosemount for using
the "defined contribution" concept. Hopkins had specical legislation while
the others just proceeded to use the method. In Gene' s report, he did not
discover any cities which were required to make a similar switch like the City
of Eagan. Most of the experiences were cities that started out using the
"defined contribution" method. Excelsior did a rather complete study and
decided not to go with it at this time. They have a unique situation in that
they are a small city with a fairly large department providing contractual fire
fighting services to neighboring communities. Gene also spoke with the Director
of Finance in Hopkins, but the inception came before his time and he did know
if there was an unfunded liability at that time. The City was contributing
one-tenth of a mill but subsequently switched to a flat dollar amount and now
makes a $5,000 contribution over the 2% premium tax. The Finance Director of
Hopkins said that their program is in good shape. Gene also learned in speaking
with Gene Stern, Treasuer of the Excelsior Fire Relief Association, that they
were advised that they could lose their ability to get benefit increases and
their ability to get tax revenue in future years. It appears that this
particular association and/or their advisors feel that the League of Minnesota
Cities is trying to gain some control of the pension situation and get everyone
into PERA. This overall concern does illustrate a problem that can be predicted
and that is a City Council cannot specifically authorize future contributions
to a relief association. It can, however, increase benefits requiring future
contributions which is' typical of a "defined benefits" plan.
Firemen' s Relief Association Memo
August 25, 1980
Page Three
The Director of Finance has reviewed the proposal being discussed between the
Finance Committee and Relief Association. There are some concerns:
1. It might be more difficult to set the contribution rate because
no fireman will be able to determine his ultimate pension. This follows from
the basic definitions of the two types of plans. Under the old plan, the pension
is fixed and the contribution is variable, while under the new, or proposed
plan, the contribution is fixed and the pension is variable. It seems that
the firemen might say on the surface that it looks good and then ask how many
dollars per month they can draw from their share of the pot for the balance
of their lives. This is not going to be an easy question to answer for a person
retiring in ten to twelve years.
2. The second point is that inflating interest rates will go the
firemen rather than to the City. This would be an advantage only if the contri-
bution rate would remain fixed. This is unlikely, assuming that contribution
will be set by attempting to determine a pension level.
In summary, the key element missing in the proposal under consideration is the
unfunded accrued liability and what happens to it if a new system is adopted.
It appears that any switch over could only be accomplished through a negotiated
process. However, given the nature of Eagan' s present plan, it appears that
significant changes would have to be combined with the new concept before it
would become practical. It appears to the Finance Director and myself that
any switch is far too complicated to undertake during the budgeting process
and it might be appropriate to address it at a later interim period.
City Administrator