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8.b)3) Statewide Volunteer Firefighter Retirement Plan , ' Meeting Date: 06/15/2010 Agenda Item: � �� ` � � City Council Agenda Report City of Scandia 14727 209th St. North Scandia, MN 55073 (651)433-2274 Action Requested: 1) Join the Statewide Volunteer Firefighter Retirement Plan (SVFRP) administered by PERA(Public Employees Retirement Association) 2) Consider whether or not to approve an increase in the annual retirement benefit for the Scandia Fire Relief Association from $2,350 to $2,500 per year of service, prior to joining the SVFRP. Deadline/ Timeline: A decision to join SVFRP must be made within 90 days of receipt of the cost analysis (by August 23, 2010) Background: • The SVFRP was created by 2009 state legislation to offer a voluntary replacement for existing Fire Relief Association retirement plans. • Advantages to participating in the state plan include removing the burden of administering a retirement plan from local relief associations, investment management by the State Board of Investment, and portability of benefits for volunteer firefighters who may serve in more than one department over their careers. • Funding of the SVFRP is from existing fire state aid, local contributions and investment earnings, the same as local relief association plans. • The decision to participate in th� SVFRP is made jointly by the city and the relief association. • In March, the City Council agreed to request a cost analysis from PERA. The cost analysis looked at current relief association investments and liabilities,the current benefit level and the future benefit level under SVFRP to estimate the cost of transitioning to the new plan. • The SVFRP benefit level options do not include Scandia's current $2,350 per year of service benefit level. (SVFRP benefit levels increment at $500.) Scandia could enter the program at the $2,500 level, and there would be a 5-year transition period before members would be vested at the higher benefit level. If, however, the benefit level were increased to $2,500 before Scandia entered the SVFRP, there would be no transition period to the higher Page 1 of 5 06/10/10 $2,500 benefit level and all retiring members would receive the higher benefit. • The benefit paid by the Scandia Fire Relief Association has changed over the last 15 years as follows (note: this may not be a complete list of increases but is what is available in the city file.) Benefit : Year: $ 900 1994 $1,000 1997 $1,200 1999 $1,350 2001 $1,550 2002 $1,700 2003 $1,900 2004 $2,200 2005 $2,350 2007 • The Relief Association would prefer that the City raise the benefit level to $2,500 before entering the SVFRP. However,because there would be additional cost to the city, we requested a cost analysis using two alternative existing benefit levels ($2,350 and $2,500) and the proposed benefit level of$2,500. • PERA has completed the cost analysis. The first year municipal contribution (for 2011, due December 31, 2011) to the SVFRP would be $58,657 (under both alternative benefit levels.) Municipal contributions the last several years have been as follows: 2005 $38,468 2006 $44,667 2007 $48,873 2008 $50,000 2009 $55,000 2010 $75,000 (Budget) • The analysis of alternative benefit levels included four scenarios: Scenarios 1 and 2 assumed a retirement age of 59, and Scenarios 3 and 4 assumed a retirement age of 55. Scenarios 1 and 3 assume that the benefit level would remain at $2,350 until Scandia joined the SVFRP. Scenarios 2 and 4 assumed that Scandia would raise the benefit level to $2,500 before joining SVFRP. • All scenarios assumed that the Relief Association would contribute $480,000 in assets to the Plan on December 31, 2010. The data provided by the Relief Association assumed that the benefit level would increase to $2,500 per year of service for members yet to retire in 2010. Should the benefit level remain at Page 2 of 5 06/10/10 r � the current $2,350 per year of service for 2010 retirees, the assets contributed would be slightly greater and the future costs to the city would be reduced. • It was also assumed that the City would make a budgeted municipal contribution of$75,000 in 2010($54,717 is the minimum contribution.) • The required municipal contributions for the first 5 years after transitioning to the SVFRP (2011-2015)were estimated, as show in the summary on page 5 of this memo and in the letter from PERA. Depending upon the assumption of retirement age, the difference between the$2,350 and $2,500 benefit levels could require in the range of$9,000 to $12,000 in additional municipal contributions over the first 5 years. The total cost to the plan could be in the range of$27,500 to $29,000. The city would be required to pay the portion not covered by investment income. • Investment income over the first five years was estimated at 6%, and State Fire Aid contributions to the fund were assumed to increase by 3.5°/a each year. If those estimates are too generous, the city's required municipal contributions will be higher. According to the 2008 State Auditor's report, the average rate of return received by fire relief associations for the previous ten years was 1.4%, well below PERA's assumption. During that same period the State Board of Investment Income Share Account had an average rate of return of 1.8%. This was a period of extreme market fluctuations. • An excerpt from the 2008 State Auditor's report on fire relief associations is attached. The average benefit for all lump-sum benefit plans in 2008 was $1,364. The average for the Metro region was $3,722. (The complete report is available on the Auditor's website,www.auditor.state.mn.us.) • In 2008, Scandia's benefit of$2,350 ranked at the 86th percentile among all relief associations, while the Relief Association's funding ratio (assets divided by accrued liabilities) of 64%ranked at the 7th percentile. • Scandia's 2008 municipal contribution to the Relief Association ($50,000) was ranked at the 98'h percentile. Two-thirds of lump- sum relief associations received a municipal contribution that year, the average amount of which was $10,335. Recommendation: I recommend that the Council adopt the resolution requesting coverage by the SVFRP administered by PERA. The Council should consider whether or not the benefit level should be raised to $2,500 before joining SVFRP based on the cost to the city and what public benefit there might be to making the change. The Council may approve the higher benefit level by passing a motion. Page 3 of 5 06/10/10 Attachments/ • Draft Resolution 06-15-10-01 Opting to Join the Voluntary Materials provided: Statewide Lump-Sum Volunteer Firefighter Retirement Plan • Plan Description, SVFRP • Letter Dated May 25, 2010, PERA • Letter Dated May 27, 2010, PERA • Excerpt, Financial and Investment Report of Volunteer Fire Relief Associations for the Year Ended December 31, 2008. State of Minnesota Office of the State Auditor, March 8, 2010 Contact(s): Jeff Biebl, Relief Association President 651 433-5694 Prepared by: Anne Hurlburt, Administrator (Join PERA SVFRP) Page 4 of 5 06/10/10 r Statewide Volunteer Firefighter Retirement Plan (SVFRP) Municipal Contributions,Alternative Assumptions&Benefit Levels Summary of PERA Analysis Scenario 1 2 3 4 Benefit Level: $2,350/2,500 $2,500/2,500 $2,350/2,500 $2,500/2,500 Retirement Age Assumption: 59 59 55 55 2011 $58,657 $58,657 $58,657 $58,657 2012 $53,282 $54,064 $55,090 $58,554 2013 $49,978 $52,792 $52,609 $55,726 2014 $47,252 $50,109 $48,014 $50,820 2015 $44,598 $47,168 $45,775 $48,300 Total Municipal Contributions: $253,826 $262,849 $260,200 $272,112 Difference: $9,023 $11,912 Total Cost, PERA Estimates: $27,576 $28,964 Page 5 of 5 06/10/10 , RESOLUTION NO. 06-15-10-02 CITY OF SCANDIA, MINNESOTA RESOLUTION OPTING TO JOIN THE VOLUNTARY STATEWIDE LUMP-SUM VOLUNTEER FIREFIGHTER RETIREMENT PLAN WHEREAS, the City of Sandia is authorized to join the Voluntary Statewide Lump-Sum Volunteer Firefighter Retirement Plan administered by the Public Employees Retirement Association (PERA); and; and WHEREAS, the City and the Scandia Fire Relief Association have jointly consented to and obtained a cost analysis for joining the Voluntary Statewide Lump-Sum Volunteer Firefighter Retirement Plan from PERA not less than 90 days ago; and; and WHEREAS, the City highly values the contributions of City Fire Deparhnent members to the safety and well being of our community and wishes to safeguard their pension investments in a prudent manner; NOW, THEREFORE, BE IT HEREBY RE50LVED BY THE CITY COUNCIL OF THE CITY OF SCANDIA,WASHINGTON COUNTY, MINNESOTA, that: 1) The City Council hereby approves coverage by and requests participation in the Voluntary Statewide Lump-Sum Volunteer Firefighter Retirement Plan administered by PERA under the terms provided in the PERA cost analysis at the$2,500 benefit level per year of service; and 2) The Mayor and City Administrator/Clerk are hereby authorized to execute all documents necessary to effectuate the intent of this resolution. Adopted by the Scandia City Council this 15th day of June, 2010. Dennis D. Seefeldt, Mayor ATTEST: Administrator/Clerk Ptar� ��scr�ipt�ar� Stat�w�d� Vo[unteer Firefighter Retirement Plan � Legislation passed in 2009 created a Statewide Volunteer Firefighter Retirement Plan (SVFRP, referred to as "the Plan" in this document) for volunteer firefighters who provide service to a municipal fire department or an independent nonprofit firefighting corporation. The Plan is voluntary, and open to fire departments as a replacement of their existing volunteer firefighter retirement plan. It is also open to municipalities currently without a volunteer firefighter retirement plan. The Plan is codified as Minnesota Statutes Chapter 353G. The purpose of this Plan Description is to provide information to volunteer firefighters, relief associations and municipalities about the Plan. It includes information about how the Plan is funded, how benefits are determined, and how an entity elects to join the Plan. Funding , The lump sum benefits payable from the Plan are funded by existing fire state aid* allocated to a municipality, additional municipal contributions, as applicable, and earnings on the investment of these funds. Each participating entity will have a separate Entity Account in which the assets necessary to fund the benefits will be maintained. A new investment account has been established in the Supplemental Investment Fund (SIF) managed by the State Board of Investment (SBI) expressly for investment of the Plan assets. The SBI is vested with the authority to determine the asset allocation of this new SIF account with the expectation that the account will earn a 6 percent return over the long-term. PERA will track separately the assets of each Entity Account within the Plan. PERA will perform annual calculations for each Entity Account to assess the level of funding needed to maintain assets sufficient to pay the benefits being earned by the participating entity's volunteer firefighters. The calculations will resemble the procedure already defined in law for use by all existing volunteer fire relief associations. Required contributions for the coming year wifl be based on service * Fire State Aid is a program that collects a premium tax from insurance companies based upon gross direct premiums, including policy fees, premium finance and other charges from custorners insuring against property losses. The premium tax is collected expressly to pay the pension costs of municipalities and non-profit fire corporations employing firefighters. The program is described in detail in Minnesota Statutes Chapter 69. Volunteer Firefighter Retirement Plan - credit data provided to PERA in March of each year by each participating entity's fire chief. Once an entity joins the Plan, future fire state aid payments allocated to that participating entity will be sent to PERA and deposited directly into the Entity's Account. If the fire state aid is not sufficient to adequately fund the account for the year, PERA will bill the participating entity for the required additional municipal contribution. Additional contributions, if any, are due by December 31 of each year. A sample time line for the calculation and billing of annual costs is found on Page 8 of this document. Governance PERA's Board of Trustees The policy-making, management, and administrative functions related to the Plan are vested in the board of trustees and the executive director of the Public Employees Retirement Association. Their duties, authorities, and responsibilities are described in Minnesota Statutes Chapter 353.03. Fiduciary activities of the Plan must be consistent with Minnesota Statutes governing public pensions. Advisory Board Chapter 353G provides for an Advisory Board made up of representatives from townships, cities, fire chiefs and volunteer firefighters. The advisory board is expected to provide advice and guidance to PERA's Board of Trustees about the retirement coverage needs of volunteer firefighters. Benefits Retirement Benefits � The Plan provides for the payment of lump sum retirement benefits that are based on a specific dollar value paid for each year of credited service accumulated by a volunteer firefighter who terminates service and meets the minimum requirements for receipt of the benefits. The dollar value payable per year of service is determined by the sponsoring municipality or entity at the .time an election to participate in the Plan is made, selected from 16 possible benefit levels. An entity may elect to increase the benefit level after joining the Plan if the Entity Account is adequately funded or if the entity authorizes the additional annual contributions necessary to fund increased benefit levels. The 16 possible benefit levels provided by the Plan are shown in detail in Table 1 on page 6 of this Plan Description. To be eligible for a benefit, a firefighter must: - be at least 50 years old; 2 Volunteer Firefighter Retirement P/an - - be vested, which means having acquired a minimum of 5 years of "good-time" service creditt in the Plan; and, - have severed his or her employment relationship with the fire department for a minimum of 30 days. A full retirement benefit is payable to a firefighter with 20 years Qf service. Firefighters retiring with fewer than 20 but more than 5 years of service are eligible for a percentage of a full benefit as described in Table 2 on page 7. Former members of the fire department who were vested at the time they left the department are also entitled to benefits when they attain age 50. Minimum participation in the Plan If an existing volunteer firefighter relief association becomes part of the Plan, the former plan benefits are payable to anyone who is vested and who leaves volunteer service within the first five years of participation in the statewide plan. A firefighter rnust participate in and earn at least 5 years of service credit in the SVFRP to receive a benefit based upon the levels provided by the Plan. Once a firefighter has participated in the statewide pla,n for at least 5 years, a11 years of credited service will be paid at the dollar value provided by the SVFRP. Non-vested benefits No benefits are payable to a firefighter who leaves the volunteer fire department before having earned five years of credited service, except as provided for under the portability provisions of the Plan as noted in the next paragraph. Portability provisions One of the goals of the Plan is to provide portability of benefits for volunteer firefighters. The Plan is designed to pay benefits to a firefighter who may not vest in one account, but when all volunteer service earned in accounts participating in the Plan is combined, the individual has earned more. than five years of credited service. If that is the case, a prorated share of benefits payable based on credits, earned in each account would be payable to the individual who meets all other requirements for payment of a lump sum benefit under the�Plan. Survivor benefits Benefits are paid to the surviving spouse of an active or deferred member who dies. If there is no surviving spouse, benefits are paid to the firefighters dependent children, and if no children, to the deceased firefighter's estate. The survivor benefit is equivalent to the lump sum benefit that would. have been t Chapter 353G does not define "good-time service credit."The chief of each participating fire department determines the minimum activity levels and length of time an individual volunteer must serve to reeeive credit. Credit may be awarded in annual or monthly increments as determined by the chief of the fire company. 3 Volunteer Firefiyhter Retirernent Plan - payable to the firefighter at age 50 using the service credit earned as of the date of death. Supplemental benefits In addition to primary benefits, the Plan provides supplemental benefits equivalent to those outlined in Minnesota Statutes Chapter 424A.10. With supplemental benefits, the retiring firefighter receives a one-time cash payment equal to 10% of the lump sum benefit up to a maximum of $1,000. For a survivor, a supplemental benefit is 20% of the lump sum, up to a maximum of $2,000.* Other benefits The Plan does not currently provide disability benefits, but it Fs expected that this will be one of the first issues for discussion by the advisory board. Process for joining the Plan The decision to participate in the Plan is made jointly by the entity operating the � fire department and the volunteer firefighter relief association (if one exists). Individual firefighters can not join the Plan on their own. The process for electing coverage of volunteer firefighters by the Plan is initiated by a request to PERA for a cost analysis of the prospective retirement coverage, as follows. i. If the volunteer firefighters are covered by an existing relief association, the secretary of the relief association must ask the relief association board to approve a request for a cost analysis from PERA. Whether or not there is an existing relief association, the chief administrative o�cer of the municipality or non-profit fire corporation that sponsors the fire department must seek approval from the city council or the non-profit's board to request a cost analysis. 2. If the municipality's council or the non-profit's board (and the re�ief association board, if one exists) approve of a cost analysis, the secretary of the relief association (if one exists) and chief administrative officer jointly submit a request to PERA's executive director for estimates of costs of the potential retirement coverage. If the volunteer fire department is associated with more than one municipality or non-profit, the chief administrative officer of each sponsoring entity of the volunteer fire department must jointly execute the request. 3. PERA prepares estimated costs for the benefit level(s) requested. * Supplemental benefits are paid by PERA, and PERA is reimbursed for their costs by the State of Minnesota. Thus, municipalities and entities participating in the Plan do not fund supplemental benefits. 4 Volunteer Firefrghter Retirement Plan - 4. The State Board of Investment (SBI) reviews the investment portfolio of the existing relief association (if one exists) and determines which assets could be transferred to SBI and which must be sold before December 31�` should the entity elect to join the Plan. 5. Upon receipt of the cost analysis, the governing body of the municipality or municipalities, or independent nonprofit corporation associated with the fire department has 90 days to approve coverage in the Plan. If the retirement coverage change is not acted upon within 90 days, it is deemed to be disapproved. If the retirement coverage is approved by the applicable governing body, a copy of the approval is sent to PERA. 6. If coverage is approved, PERA begins administering the Pfan for the entity effectiv� the following January 1 and issues all future benefit payments. 7. On the date immediately prior to the effective date of the coverage change (December 31), the special fund of the applicable volunteer firefighters'.relief association, if one exists, ceases to exist as a pension fund of the association and legal title to the assets of the special fund,transfers to the State Board of Investment. With some modifications, the relief association may continue as an organization and maintain its general fund. 8. If coverage is not approved, the Plan is not extended t4 firefighters and the firefighters continue as before with or without a relief association benefit plan, as applicable. 5 ✓olunteer Firefighter Retirement Plan - �a6�fe 1 Options for benefit levet� Cash benefit per year Benefit Level Of "good-time" � service credit A $500 B $750 C $1,000 D $1,500 E $2,000 F $2,500 G $3,000 H $3,500 I $4,000 J $4,500 K $5,000 L $5,500 M $6,000 N $6,500 O $7,000 P $7,500 Benefit Example The City of Anytown joined the Plan and selected level C as the benefit level for their volunteer firefighters. If a firefighter had 20 years of good time service credit and �hen "retired" at age 50, that firefighter would 6 Volunteer Firefighter Re�irement� Plan - receive a lump sum benefit of $20,000 ($1,000 per year of service times 20 years). T�bEe 2 Proratec! bEnefits f�� artic'rpants with a$ lea�t five, b�t less than 2(1 years of service credit Completed full percentage of the years of good-time full service pension service credit 5 40% 6 44% 7 48% 8 52% 9 56% 10 60% 11 64% 12 68% 13 72% 14 76% 15 80% 16 84% 17 88% 18 92% 19 96% 20 or more 100% Benefit Example The City of Anytown joined the Plan and selected level C as the benefit level for their volunteer firefighters. If a firefighter had 10 years of good time service credit and then "retired" at age 50, that firefighter would receive a lump sum benefit of$6,000. That is calculated by multiplying the number of years of good.time service credit (10 in this example) times the benefit level (Level C in this example, or $1,000 per year of service) times the nonforfeitable percentage of the service pension (60% in this example) since the firefighter had less than 20 years of service. 7 Volunteer FirefightPr Retireme,�it Plan - 10 x $1,000 x 60% _ $6,000. 8 Volunteer Firefighter Retirement Plan - �'abl� 3 Exar�pl� sch�dule for payn�ent of requiree� contributions March 31, 2009 Deadline for Fire Chief to certify good-time service credits to PERA for previous calendar year. Spring 2009 , PERA calculates liabilities and required contributions for 2010. Summer 2009 PERA notifies municipalities and non-profit fire companies of required contributions for 2010. October 1, 2010 PERA receives Fire State Aid for the former relief associations and new plan sponsors. If the employer received an invoice for employer Dec. 31, 2010 contributions, the payment is due by the end of the year. 9 Public Employees Retirement Association of Minnesota 60 Empire Drive,Suite 200 Saint Paul,Minnesota 55]03-2088 Member Information Services:651-296-7460 or 1-800-652-9026 Employer Response Lines:651-296-3636 or 1-888-892-73 PERA Fax Number:651-297-2547 ♦ PERA Website:www.mnpera.org May 25,2010 Anne Hurlburt City of Scandia 14727 209�' St. N. Scandia,MN 55073 Dear Anne: We received your request for a cost analysis to estimate the ongoing cost of joining the statewide volunteer firefighter retirement plan administered by PERA. Based on the information you and Emie Yoch provided to us, we have developed a cost analysis for Scandia. The results are shown below: A. Benefit Level (per year of service): $ 2,500 B. Estimated yearly normal cost: $ 70,811 C. Estimated yearly admin expenses: $ 960 D. Estimated beginning asset value: $480,000 E. Estimated beginning liability: $846,862 F. Estimated Deficit Amortization Pmt((E-D)/10): $ 36,686 G. Estimated Total Required Contribution (B+C+F): $ 108,457 H. Estimated Investment Income(D x 6%): $ 28,800 I. Estimated Fire State Aid (State Auditor Estimate): $ 21,000 J. Estimated Municipal Required Contribution (G-H-I): � 58,657 Please note that these are estimates only, and assume that you would join the statewide plan on January 1,2011 (the next available date for joining the plan). This cost analysis assumes the relief association will have$480,000 in assets as of December 31,2010. It assumes that Chuck Preisler will retire in September 2010,and that 6 new volunteers will be"hired"this summer,as per Mr. Yoch. It also assumes that all active members will be paid out at the$2500 benefit level when they retire. Should the City remain at the$2,3501eve1 and volunteer firefighters retire during the first 5 years,your costs should decrease slightly,everything else remaining equal. As you know,because Scandia has several volunteers eligible to retire and in their mid to late 50's,it is likely that the required municipal contribution will increase for 3 or 4 years as those members retire,but will then fall to a level that will most likely be lower than the level shown above. In accordance with Minnesota Statute 353G.05,if you wish to join the statewide plan,we must received a signed resolution from the governing body of your municipality within 90 days of the receipt of this cost analysis. Please send that resolution to my attention,and include the benefit level approved by the governing body. If you do not send in a resolution,you may request another cost analysis at any time in the future. Should you have any questions,please feel free to contact me at 651-201-2641 or at dave.dejonge@state.mn.us. Sincerely, Dave DeJonge Assistant Director,PERA Public Employees Retirement Association of Minnesota 60 Empire Drive,Suite 200 Saint Paul,Minnesota 55103-2088 Member Information Services:651-296-7460 or 1-800-652-9026 Employer Response Lines:651-296-3636 or 1-888-892-73 PERA Fax Number:651-297-2547 ♦ PERA Website: www.mnpera.org May 27,2010 Anne Hurlburt City of Scandia 14727 209"' St.N. Scandia,MN 55073 Dear Anne: I received your request for a cost analysis of retirement coverage in the Statewide Volunteer Firefighter Retirement Plan. I have recently received information from the Relief Association regarding assets and expected changes in staffing,and have included that information in my analysis. As requested, I ran several scenarios in order to give you a feel for the cost of increasing the Relief Association's benefit level from$2,350 to $2,500 before joining the statewide plan. I ran 5 years worth of data using 4 sets of assumptions. In every case I assumed that the relief association would join the statewide plan at the end of this year and provide $480,000 worth of assets on December 31, 2010. I assumed that 6 new firefighters would be hired this summer,and that new firefighters will be 30 years old when they are hired. I assumed that the Fire Department would never have fewer than 25 volunteers. I assumed that Mr. Morrison,who turns 61 in 2010,will retire in 2011. I assumed that the fire department would join the statewide plan at the$2,500 benefit level. Finally, I assumed that Fire State Aid would equal $21,000 the first year and would increase 3.5% each year after that. Although Fire State Aid has dropped over the last couple of years,it is expected to begin increasing again this year. The amount of Fire State Aid does not affect the cost of benefits,but does affect the required municipal contribution. Scenario 1 In the first scenario I assumed that all firefighters retired when they turned 59 and received their lump sum benefit that year. I also assumed that the benefit level would remain at $2,350 until Scandia FD joined the statewide plan, then would increase to $2,500. Volunteer firefighters who retired during the first five years would have their benefit based on the benefit level in effect before joining the statewide plan($2,350). Under that scenario,the total cost of paying benefits for the first five years(2011 —2015)would be$498,878. Based on the cash flow,required municipal contributions would look like this: Year Amount 2011 $58,657 2012 $53,282 2013 $49,978 2014 $47,252 2015 $44,598 Scenario 2 In the second scenario I assumed that all firefighters retired when they turned 59 and received their lump sum benefit that year. I also assumed that the benefit level would increase to $2,500 before Scandia FD joined the statewide plan,then would remain at $2,500. Volunteer firefighters who retired during the first five years would have their benefit based on the benefit level in effect before joining the statewide plan($2,500). Under that scenario,the total cost of paying benefits for the first five years(2011 —2015)would be$526,454. The difference between the cost of paying benefits in scenario 1 and 2 is $27,576($526,454- $498,878). Thus,based on these assumptions,the cost of increasing the benefit level before joining the statewide plan is$27,576. Based on the cash flow in this scenario,required municipal contributions would look like this: Year Amount 2011 $58,657 2012 $54,064 2013 $51,792 2014 $50,109 2015 $47,168 As you can see,although the pattern remains roughly the same,the cost to the city is higher because more assets were taken out of the fiznd to pay the higher benefits. Scenario 3 In the third scenario I assumed that all firefighters retired when they turned 55 (rather than 59) and received their lump sum benefit that year. I also assumed that the benefit level would remain at$2,350 until Scandia FD joined the statewide plan,then would increase to$2,500. Volunteer firefighters who retired during the first five years would have their benefit based on the benefit level in effect before joining the statewide plan($2,350). Under that scenario,the total cost of paying benefits for the first five years (2011 —2015) would be$520,615. Based on the cash flow,required municipal contributions would look like this: Year Amount 2011 $58,657 2012 $55,090 2013 $52,609 2014 $48,014 2015 $45,775 Scenario 4 In the final scenario I assumed that all firefighters retired when they turned 55 and received their lump sum benefit that year. I also assumed that the benefit level would increase to $2,500 before Scandia FD joined the statewide plan,then would remain at $2,500. Volunteer firefighters who retired during the first five years would have their benefit based on the benefit level in effect before joining the statewide plan($2,500). Under that scenario,the total cost of paying benefits far the first five years(2011 —2015)would be$549,579. T'he difference between the cost of paying benefits in scenario 3 and 4 is $28,964($549,579 -$520,615). Thus,based on these assumptions,the cost of increasing the benefit level before joining the statewide plan is $28,964. That is roughly the same as the difference calculated when I assumed all volunteer firefighters would retire at age 59. Assuming most volunteer firefighters will retire somewhere between the ages of 55 and 59,the cost of increasing the benefit level from$2,350 to $2,500 before joining the statewide plan would be around$28,000. The City would need to pick up the portion not covered by investment income. Based on the cash flow in this scenario,required municipal contributions would look like this: Year Amount 2011 $58,657 2012 $58,554 2013 $55,726 2014 $50,820 2015 $48,300 As you can see once again,although the pattern remains roughly the same,the cost to the city is higher(especially in 2012 since several are assumed to retire in 2011)because more assets were taken out of the fund to pay the higher benefits. The figures shown above are only estimates. They assume that the assets have an investment return of exactly 6% each and every year. Actual required municipal contributions will be calculated by August 1 every year and due by the end of the following calendar year. The amount due in 2011 will be calculated by the State Auditor when you file your SC-10 report this year, so will be different from the figures shown above. Should you have any questions,please feel free to contact me at 651-201-2641 or via email at dave.dej onge@state.mn.us. Sincerely, Dave DeJonge Assistant Director, PERA �,,�c.�-�-f- z�o8 �-hc�-c. ��a�' i�.e�,�. . higher than its liabilities. Since a relief association's benefit level has a direct impact on its accrued liability, a high funding ratio suggests that the benefit level is low compared to the relief association's assets. Fifteen relief associations had funding ratios above 200 percent at the end of 2008. The Hollandale Fire Relief Association had the highest funding ratio, at 19,889.8 percent. This relief association, which incorporated in 2006, had a benefit level of$1 per year of service. Other plans with exceptionally high funding ratios included the Kerrick and Brownsville Fire Relief Associations, at 2,878.7 percent and 1,232.1 percent, respectively. Both of these relief associations also were recently incorporated. Funding ratios of less than 100 percent or greater than 200 percent may be hard to maintain consistently over time. For under-funded relief associations, continued large required municipal contributions may cause municipalities to become less willing to approve future benefit increase requests. In the case of over-funded relief associations, future benefit increases may be viewed as unfair to retired members who provided service for years when the plan was over-funded. Maintaining a steady funding ratio over time ensures that all retiring members of the relief association receive an equitable pension benefit. Tables 3-A, 3-B, and 3-C on pages 59 through 77 show funding ratios for each relief association, along with their ranking relative to other associations of the same benefit type. Benefit Levels Benefit levels vary greatly among relief associations in Minnesota. Typically, relief associations with more assets are able to offer higher benefits to their members. The average benefit level for lump sum plans in 2008 was $1,364. The 2008 average represents a 4.4 percent increase from the 2007 average of$1,306. Only 34.2 percent of lump sum plans offered a benefit level higher than the 2008 average of$1,364. The maximum lump sum benefit level allowed under state law for the majority of 2008 was $7,500 per year of service, although the maximum increased to $8,300 per year of service on December 31, 2008. Both the Northfield and Shakopee Fire Relief Associations offered a $7,500 benefit level for 2008. A member who retired after serving for 20 years with either of these relief associations would receive a $150,000 lump sum benefit. The Brainerd and Hopkins Fire Relief Associations also offered benefit levels of at least $7,000 per year of service. Due to recent legislation, the maximum allowable benefit level is set to incrementally increase until it reaches $10,000 per year of service on December 31, 2010. The Hollandale, Kerrick, and Saint Augusta Fire Relief Associations all had benefit levels of$1 per year of service in 2008. A member who retired after serving for 20 years with one of these relief associations would receive a $20 lump sum benefit at the current 20 level. As these plans build their assets, conesponding benefit increases should be considered to ensure equitable retirement benefits to their members. Other relief associations offering a benefit level less than $100 per year of service include Brownsville, Colvill, Culver, and Northland. For monthly/lump sum combination plans the average lump sum benefit level was $4,395, a 6.1 percent increase from the 2007 average of $4,144. The Brooklyn Center and Plymouth Fire Relief Associations offered the largest lump sum benefits of the combination plans, both at $7,500 per year of service. The monthly component of these plans had an average benefit of about $24. The Eden Prairie and Minnetonka Fire Relief Associations offered the highest monthly benefit levels of the combination plans, at $54 and about $53 per year of service, respectively. A 20-year retiring member from the Eden Prairie Fire Relief Association that chooses the monthly option would receive $1,080 every month for the remainder of the member's life. The average monthly benefit for the five relief associations that offer only monthly benefits was $22. The Spring Lake Park Fire Relief Association offered the highest monthly benefit of this group at$34. The lowest monthly benefit was offered by the Pine � City Fire Relief Association, at just over$8 per year of service. During 2008, 31.2 percent of the defined benefit plans that offer a yearly benefit increased their benefit level. Only 25 of the 190 plans that increased their benefit level were fully funded. It is possible that some of the plans increased their benefit level early in 2008 before the financial crisis in the third and fourth quarters. These plans may have been fully funded at the time of the benefit increase. The Bemidji Fire Relief Association had the largest benefit increase, going from $4,150 to $5,000 per year of service in 2008. The Detroit Lakes and Pillager Fire Relief Associations each increased their benefit levels by $700. All three of these plans were less than 100 percent funded at the end of 2008. Investment losses likely had the largest impact on the funding ratios, but the benefit increases also played a part by increasing the plans' liabilities. The Geneva Fire Relief Association had the largest percentage benefit increase at 100.0 percent, increasing its benefit level from $100 to $200 per year of service. Even with the increase, Geneva was 127.0 percent funded at the end of 2008. The Lancaster and McDavitt Fire Relief Associations each increased their benefit level by two-thirds. Eighty-eight, or 46.3 percent, of the relief associations that increased their benefit level had a percentage increase of ten percent or less. Six relief associations decreased their benefit levels during 2008. The Braham Fire Relief Association decreased its benefit level from $1,530 to $1,050, leaving the plan 92.6 percent funded. Braham decreased its benefit level for the second consecutive year in 2008. The Barnesville Fire Relief Association had the highest percent benefit decrease at 40.0 percent, decreasing its benefit level from $1,000 to $600 per year of service. The other plans that decreased their benefit levels in 2008 were the Atwater, Babbitt, 21 Monticello, and Willmar Fire Relief Associations. Some relief associations were statutorily required to decrease their benefit levels during 2008 to the last municipally- approved benefit level due to the market downturn. Regional Analysis Thirteen economic development regions were established by the state legislature to work with and on behalf of local units of government. For the reader's convenience, relief association data is summarized by economic development region and analyzed for regional trends. Current Trends The Metro Area region continued to have the highest average lump sum benefit level in 2008, at $3,722 per year of service. The Metro Area region's average increased by 2.1 percent compared to the 2007 average of $3,644 per year of service. The Central and North Central regions followed with average benefit levels of$1,733 and $1,493 per year of service, respectively. The Northwest region had the lowest average benefit level at $764 per year of service. The Northwest region's 2008 average of $764 per year of service was a 0.3 percent increase over the 2007 average of$762 per year of service. In 2008, the East Central region had an average benefit level of$1,428 per year of service, which was a 2.9 percent decrease over the 2007 average benefit level of$1,470 per year of service. The decrease is a result of the addition of the Kerrick Fire Relief Association and its $1 per year of service benefit level to this region. Because of its recent inception, Kerrick was not included in the 2007 report. The Southeast region had the highest average funding ratio for defined benefit plans by a large margin in 2008, at 362.9 percent. However, this was a 60.5 percent decrease over the 2007 average funding ratio of 918.9 percent for the Southeast region. The region's funding ratio is affected by the Hollandale Fire Relief Association's extremely high ratio. The East Central region had the next-highest average funding ratio at 177.0 percent. The Upper Southwest region had the lowest average funding ratio for defined benefit plans during 2008, at 81.9 percent. In 2007, all thirteen regions had average funding ratios above 100 percent. In contrast, only five regions had average funding ratios above 100 percent in 2008. In 2008, all thirteen regions had negative average rates of return. The Northwest region had the highest average rate of return in 2008, at negative 13.9 percent. The Southwest and South Central regions were close behind with average rates of return of negative 14.3 percent and negative 15.6 percent, respectively. The Metro Area region had the lowest 22 average rate of return at negative 24.3 percent. The Southwest Central and Central regions had the next-lowest average rates of return at negative 23.2 percent and negative 22.0 percent, respectively. Long-Term Trends Relief associations in the South Central region had the highest 10-year average rate of return at 2.0 percent. The Northwest and Southwest regions had the next-highest 10-year average rates of return at 1.9 percent. Statutory guidelines assume a rate of five percent growth for relief associations. Therefore, it is important for relief associations to target long-term returns of at least five percent. As of 2008, none of the thirteen regions had 10-year average rates of return above five percent. The Metro region had the lowest average rate of return over the 10- year period at 1.0 percent. The Arrowhead, Central, and East Central regions all had 10- year rates of return of 1.1 percent. To put the market downturn of 2008 into perspective, the 11-year rates of return for the period ending in 2007 ranged from 4.7 percent to 6.0 percent. The maps on the following three pages show the 2008 lump sum benefit level, average 2008 rates of return, and average 10-year rates of return by economic development region. 23 2008 Lump Sum Benefit Level by Economic Development Region �� f�� . ,, � �`a .�.,` ,� j �i 7� 1 C Re ,ion 2' � '�� ,�, �, �.�v x Region 1 �. ��,��' ��;� ��„ro , � 6 ��1348' �F � �� ,':� . 5764 s,�;. � .�;k� ', ��. , � ' r„'kl� . . � �Re ion 3 �� „� ��;: t�fl��,� � �� ;� $1,025, . � ,�, `�' � � '`4 �� S, � 4' �`� �� "�,,,� �'�.� '�� '� �� ' '� "�„;'�,"��,> �.� �� , ��` ��'��`� ;:- - Economic Regions e ion 4 �; Region 5 �� r � � � �^� * '� � $1,074� � ' � �'�' .. �� $1,493��. �,,, ,��,� 1 . Northwest ,;s� ��, �, �� _ :„�F��`� �` �'`k' 2 ... Headwaters M�r � �.k��.�,�� `� : ^ ,��r�, ,� �� ,�� 3 ... Arrowhead ,,;� � Re�ion 7E 4 ... West Central �'' �'' � ��r� �� ,��,�. � � �u� ��,��. ` Re ion 7W $1,428 +� 5 ... North Central $1,733 6E ... Southwest Central 6W ... Upper Southwest egion 6W �� ;, 7E ... East Central $1,153 Region 6E ' `� ` Re ion 11 7w ... Central $812 $3�722 s ... southwest 9 ... South Central 10 ... Southeast 11 ... 7-County Metro Area Region 8 Re ion 9 Re ion 14 $899 $1184 $1,155 Legend � Less than $900 Q $1,200 to $1,500 $900 to $1,199 Greater than $1,500 24