A-3. Discuss Potential Fire Relief Pension IncreaseIWT
MEMORANDUM
Phone: 952.227.1100
TO:
Mayor &City Council
CITY OF
Building Inspections
The topic was addressed as part of the Fire Study last year, which indicated that
� .
CFROM:
Fax: 952.2277.1190 .1190
Greg Sticha Finance Director
7700 Market Boulevard
DATE:
July 28
Jul , 2014
�
PO Box 147
report on the current funding level, and some assumptions used for a potential
b
Chanhassen, MN 55317
SUBJ:
Discuss Potential Fire Relief Pension Increase
Administration
BACKGROUND
Phone: 952.227.1100
Fax: 952.227.1110
Staff has been working with the Fire Relief Board discussing potential funding
alternatives and increases to the fire relief pension for the past couple of years.
Building Inspections
The topic was addressed as part of the Fire Study last year, which indicated that
Phone: 952.2 0
the city's lump sum funding amount was slightly below the average of our KFS
Fax: 952.2277.1190 .1190
cities ($180 below average). One of the City Council's KFS strategic goals for
Engineering
2014 was to research varied funding alternatives and funding levels of the
Phone: 952.227.1160
current fire relief pension. The information in this memo addresses the research
Fax: 952.227.1170
completed, a survey and history of funding levels, a recently completed actuarial
report on the current funding level, and some assumptions used for a potential
Finance
increase.
Phone: 952.227.1140
Fax: 952.227.1110
FUNDING TYPES/ALTERNATIVES
Park & Recreation
Phone: 952.227.1120
Staff began researching possible new approaches to funding volunteer firefighter
Fax: 952.227.1110
pensions, which included a defined contribution rather than the existing defined
benefit pension.
Recreation Center
2310 Coulter Boulevard
Phone: 952.227.1400
A defined benefit ension simply s the benefit the member receives upon
p p y i p
Fax: 952.227.1404
retirement and is a set amount determined by the local government authority. In
the State of Minnesota, the most common type of defined benefit pensions are
Planning &
"lump sum" pensions. A lump sum pension is a set benefit amount ($5,050
Natural Resources
currently in Chanhassen) for each year of service to be distributed upon
Phone: 952.227.1130
Fax: 952.227.1110
retirement. There are a number of other provisions to receive the pension, but
p
vesting begins at 5 years and firefighters are 100% vested at 20 years in the City
Public Works
of Chanhassen.
7901 Park Place
Phone: 952.227.1300
A defined contribution pension differs from a defined benefit pension in that an
Fax: 952.227.1310
annual contribution is made during each year of service from the local
government authority. In most cases, the amount contributed to a defined
Senior Center
contribution pension is less than a defined benefit pension plan and would limit
Phone: 952.227.1125
future liabilities of the City to only the contribution made each year for the
Fax: 952.227.1110
eligible active firefighters.
Website
www.ci.chanhassen.mn.us
In the State of Minnesota, nearly 90% of fire relief pensions are lump sum
defined benefit pensions, with fewer than a handful of Twin Cities metro
communities having defined contribution pensions.
Chanhassen is a Community for Life - Providing for Today and Planning for Tomorrow
Mayor & City Council
July 28, 2014
Page 2
Staff began researching the possibility of implementing a new defined
contribution plan for all new members eligible for pensions on the fire
department. Staff sought the advice of legal counsel, Soren Mattick at Campbell
Knutson. After discussions with Mr. Mattick, he indicated that Minnesota state
law does not allow for the creation of two types of fire relief pensions, either a
defined contribution or defined benefit plan must be chosen (see statutes below).
Additional discussions were held with the State Auditor's office to see if two
separate relief associations could be created, thus allowing for the establishment
of one association that has a defined benefit pension and another with a defined
contribution pension. At this time, it appears that special legislation would be
required to do so.
424A.002 AUTHORIZATION OF NEW OR CONTINUING VOLUNTEER
FIREFIGHTERS' RELIEF ASSOCIATIONS.
Subdivision 1.Authorization.
A municipal fire department or an independent nonprofit firefighting
corporation, with approval by the applicable municipality or municipalities, may
establish a new volunteer firefighters' relief association or may retain an existing
volunteer firefighters' relief association.
Subd. 2. Defined benefit or defined contribution relief association.
The articles of incorporation or the bylaws of the volunteer firefighters' relief
association must specify that the relief association is either a defined benefit relief
association subject to sections 424A.015, 424A.02, and 424A.091 to 424A.094 or
is a defined contribution relief association subject to sections 424A.015 and
424A.0 16.
Staff may continue to pursue the idea of getting special legislation in order to
adopt a defined contribution pension for all new firefighters, if directed by
council to do so.
LUMP SUM PENSION HISTORY AND CURRENT SURVEY
Attached are documents that show the history of the Chanhassen Fire Relief
pension as well as the current status of pensions in KFS cities.
The last pension increase to the lump sum benefit took place in 2008. The
current lump sum of $5,050 has been in place since that point. Staff researched
city employee compensation increases since 2008, including a possible increase
effective January 1, 2015, and the total percentage increase is 17.5% (see
attached). This equates to an approximate $884 increase in the lump sum
pension amount, bringing it to just under $6,000.
Staff also surveyed KFS cities for current funding levels and when the last
increase was adopted (see attached). Increasing the current lump sum pension to
$6,000 would put the city in approximately the 66th percentile, with three cities
having higher pension amounts and six with lower amounts.
f. \gregs \fire pension\fire relief pension funding alternatives 7- 28- 14.docx
Mayor & City Council
July 28, 2014
Page 3
RECENTLY COMPLETED ACTURIAL
In June of 2014, staff hired the actuarial firm of Duane Hanf to conduct an
analysis of the pension funding level as well as incorporate some assumptions
into a possible funding increase for later this year. The study found the
following results:
• The funded percentage of the relief association was at 89% as of
December 31, 2013. The estimated additional required contribution
of the city for 2014 (based on the current funding level of
$5,050 /year of service and assuming a similar state aid amount to the
previous year) will be zero.
Staff also asked Mr. Hanf to make projections, using the assumption of raising
the benefit level to $6,000 per year of service with either a 5% or 7% rate of
return on investments. Under either assumption, increasing the benefit level to
$6,000 will keep the city's required additional contribution at zero for 2014.
Increasing the benefit level to $6,000 shaves the funding percentage to 78 -81 %
funded. Based on Mr. Hanf s analysis using a funding level of $6,000 lump sum
benefit, the future years (beyond 2014) may require an annual contribution from
the City. This would range from as low as $12,000 to $30,000 thru 2017.
Based on this actuarial analysis, staff believes a lump sum benefit of $6,000 per
year of service could be realized in 2014:
• without increasing the city's required annual contribution above
currently budgeted amounts;
• keeps this year's required contribution at zero; and
• keeps the funding percentage above 75 %.
(See attachment, history of funding percentage in Fire Relief.)
RECOMMENDATION
Staff recommends that the City Council proceed with increasing the lump sum
Fire Relief pension amount from the current level of $5,050 per year of service
to $6,000 per year of service. In addition, staff looks for direction from council
on whether to pursue special legislation to achieve the possibility of having new
firefighters be a part of a defined contribution pension system rather than a
defined benefit pension system.
ATTACHMENT
1. Fire department wage and pension historical information as compared to
city employee wage compensation.
2. Survey of KFS cities Fire Relief pension funding levels.
3. Actuarial report from Hanf Actuarial dated July 2014.
4. Fire Relief Funding Percentage History.
f: \gregs \fire pension \fire relief pension funding alternatives 7- 28- 14.doex
City
Current Lump Sum
Date of Last Increase
Previous Lump Sum
Current Funding Ratio **
Chanhassen
$ 5,050
1/1/2008
$ 4,700
82%
Andover
N/A
N/A
N/A
100%
Chaska
6,255
5/5/2014
6,000
79%
Cottage Grove
3,150
Unknown
Unknown
115%
Elk River
5,167
1/1/2014
5,091
96%
Farmington
4,575
1/1/2009
4,200
83%
Lino Lakes (Centennial Fire Dist till 2016)
4,200
4/26/2012
4,000
109%
Prior Lake
6,800
2/24/2014
6,500
100%
Rosemount
6,900
1/1/2007
6,100
101%
Savage
5,329
1/1/2014
5,225
85%
Stillwater
5,000
Unknown
Unknown
121%
Average 5,264
Top of Range 6,900
Bottom of Range 3,150
Range Difference 3,750
Difference Between Top & Avg 1,636
75th Percentile
6,082.00
** - Current funding ratio is based on Minnesota State Auditors FF Pension report as of December 31, 2012
N/A - Andover has a defined contribution plan.
C KV of Chanhassen
Fire Department VIVage & Pension Hstory
City Employee Wage History
LV000
3.55) V0/0
2009
3.50
2010
0.00%
2011
1.00
2012
1.50
2013
2.00
2014
3.00%
2015 EST
3.00%
Tota 1
17.50%
Huns actuarial Inc,
Summary and Comparison of Results
ummarized below are the result.; of the Valuation Compareed to the previous valuation:
12/31/201.2
12/31/2"013
.. 5{
M OM
Participants
Actives
49
47
Retiree$,
:f
. .
Beneficiaries
0
0
Defc-i-red
19
Total
77
75
Normal Cost
$80,314
$82,25
Actuarial Liability
$2,980,865
$2,875,460
t ►ssets
$2.393,273
$2,551,904
Funded .Percentage
80 °l
89%
Unfunded Aetuartal Liability
$587,59
$323455+
Required Total Contribution
$167,163:
$142,5.01
{city plus state}
i' itnatecl 1°Vi` nimuni City.
$56,442
$0
Contribution. Requirement
The .required total contribution requirement decreased from $1 67,163 as of 12131!2012 to
$142,501 as, of 1213112413. The reasons for this $24,662 decrease are given below:
Chang: in 'Required
Change .%due 'f Contribution
1) Benefit level increased - none $0
2) Actuarial experieft e (turnover, investinent ,return contributions; 4
pa}�out, etc.) dilerent from. assumed,
Total ($241662)
4
................
Cost Impact of Increasing nefi
You requested that I quantify the impact of improving; the benefit level for actives from.
$5,050 to $6,000. The results are as follows:
Normal Cost
Actuarial l-iability
Assets
Funded I'ercenta,(,,,,e
Minimum Required "Dotal
Contribution (including an
expense allowance)
$51,050 Level $61,0100 Level
$,25
$97,7301
$2,87.5,460
$3,200,351
$2,551,904
$2,551,904
89%
80%
142,501 * j $184.819*
Before subtracting state aid ($159,506 in 2013). Increase in actuarial liability amortized
over 20 years. N o increase in bce nef is for retirees or deferred vested participants assumed.
5
Financial and Actuarial Status on 12/31/2013
AS Sets
Market value of plan assets as of 12131/2013 as reported by Annual Financial report:
Cash $0
Investments $2,540,3847
Accrued Income $0
Contribution receivable
1.1abilibes $600
oltal. $2,551,904
Normal Cost as of 12131120.13
The breakdown of the normal cost as of 12/3112013
Service Retirement
Disability
Withdrawal
Pre-retirement Death
Total
is as Bollows:
$5.1,44.5
$2,5 7 0
$25,632
—12-,609
$82!12156
Mnanel'al, and Actuarial Status on
12/31,12013
(continued)
A ctuarial Liability as of.1213112013
1. Active Participant Liability
$1,727,054
2. Inactive Participants Liability
$1,148,406
3. "Fotal Actuarial Liability: (1) + (2)
$2,875,450
4. Assets
$21551,904
5. FUlided Percentage: (4) / (3) x 100%
89%
6. UntUnded Actuarial Liability: (3) - (4)
$323,546
7. Cbange in Unfunded.. due to benefit,
$0
increases:
Nojected Funded Percentage 1213.112014
8. Potential benefit payouts during 2014
$1,064842
9. 'Normal Cost for 201.4
$82,256
10. P Jected Actuarial Liability 12/31/201.4:
. rcii
$1,987,518
((3) + (9) —(8)) x 1.05
It. Projected assets. 12/31/2014:
$1,747,542
(4)* 1.05 + $159,506 -, (8) x 1.025
12. Projected funded percentage 12/31 /210 14:
88%
7
Contribution Requirement
In accordance with h Minnesota 'State Statues (Chapters 69 and 356), the contribution level for any
given year is a combination of the Normal Cost for that gear, a provision for anticipated
administration e xpe:nses, and an amount w reduce the Unfunded Actuarial Liability. The minimum
contribution requirement i s shown below.
1. Normal Cast $82,256
2 Nine year amortization of Unfunded $43352
,Actuarial Liability before benefit increase
, Twen y year amortization of Unfunded
$0
Liability due to benefit increase
4.Expense allowance:
$10,107
(2013 expenses x 1.035)
5. Required Contribution as of 12!3112013:
$1.35,71.5
1) + (2) + (3) + (4)
6. Required Contribution as of 1213112:014:
$l 42,501
(5) x 1.05
?. Estimated State Aid (201' ) amount)
$159,506
8. Estimated Required Minimum City
$0
Contribution: (5) -(6): but :not less than $0
8
Summary of Plan Prov* 'ons as of 1.2/31/2013
Isi
Normal Retirement Benefit Lump Sum Benefit accruing at the rate of $5,050 per year of
service. Benefit is payable on retirement after attaininent of age
50 and completion of 20 years of service. No limit on the number
of years of service credited..
Deferred Vested Benefit Oil termination. after completion of 5 years of service, the lump
sum Normal Retirement Benefit accrued is payable. on attainment
of age 50 subject to the following vesting schedule:
Years of Nonforfeitable Years of Nonforfeltable
Set-vice Percentage Service. PercenM
5 40% 13 72%
6 44% 14 76%
7 48% 15 800/0
8 52% 16 84%
9 56% .17 88%
10
18 92 60% %
1.1 64% 1:9 96%
12 68% 201 10 0 b/0
Disability, Ben.efit Oil the peri-nanent disablement of any active member, 100% of the
member's accrued lump sum benefit is payable immediately,
Death Benefit S 1,000 I ump sum payable on the death of any retired member
receiving a monthly benefit.
$25,,,000 lump sum payable . on the death of any non-vested (i.e.
less than 5 years of service) active member.
Survivor's Benefit On the death of any vested active member, 100% of the. member's
accrued lump u
-in bene-fit is payable to the named beneficiary
s
commencing immediately.
9
Actuarial Assumptions and Funding -Method
In*Vestinent Return 5"/o per year after investment expenses.
Mortalitv Rates RP2000 fully generational using prqjection scale 1313
Termination Rates .rte
25
.13.6%
30
10.1%
35
7,911/0
40
6.5%
45
5.5%
50
4.5%
55
0%
DI:sabIIity Rates .03%
at age 20, grading to .33% at age 50
Ri6tirement Age Later
of ne 50 and 20 Nears of service.
Asset Basis TvIark-et value
Funding Method Entry, Age'Norm.al Method;
N.ormal Cost under this funding method is equal to
the level annual dollar amount starting at entry age
n✓eesSary to -fund. the Proiected benefits.
Actuarial Liabili.tv is accumulation of Normal Costs
to date. Unfundcd Actuarial fliabIlity is amortized
over 20 years -from date of establishment of the
liability.
10
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City Of Chanhassen
-ire Relief Funding Percentage History
12/31 /2003
69.0%
12/31/2004
82.8%
12/31/2005
88.4%
12/31/2006
91.5%
12/31/2007
95.5%
12/31/2008
65.6%
12/31/2009
77.9%
12/31/2010
81.8%
12/31/2011
77.7%
12/31/2012
80.3%
12/31/2013
89.0%
AVG
81.8%