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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