H.F. 520 (Smith); S.F. 618 (Pogemiller): Minneapolis Firefighters Relief Association; Increasing the Salary of the Executive Secretary, revises Minnesota Statutes, Section 423C.03, to permit the Minneapolis Firefighters Relief Association (MFRA) Executive Secretary to receive a salary up to 50 percent of the maximum salary of a first grade firefighter, rather than up to 30 percent of that firefighter salary. The increase would be retroactive to August 15, 2002, when the MFRA membership voted to increase this salary to 50 percent of the salary of a first grade firefighter.

MFRA History. The Minneapolis Firefighters Relief Association (MFRA) was established in 1868, initially to provide relief to disabled firefighters and their families at a time when the Minneapolis Fire Department was a volunteer fire department. After the department became a paid fire department, the association incorporated under Minnesota law in 1886. The association began paying service pensions to retiring firefighters in 1897.

The MFRA is managed by a governing board of 12 members:

• five active firefighters,

• five retired members or surviving spouses, and

• two city of Minneapolis representatives appointees.

In addition to maintaining records and determining benefit amounts, the governing board is responsible for investing all plan assets of the special fund, general fund, and health insurance accounts.

In Minnesota, as public employee pension coverage has developed, there is a combination of statewide public pension plans and local public pension plans. The MFRA is one of the state’s local public employee pension plans and one of the few remaining local plans for police or paid firefighters. The other remaining local public safety plans are the Minneapolis Police Relief Association, Fairmont Police Relief Association, and Virginia Fire Relief Association.

Membership in the MFRA and other local police and paid fire relief associations which accepted the various state amortization aids were closed to new members in 1980. Police and paid fire hirees after that date are covered by the statewide Public Employees Retirement Association Police and Fire (PERA-P&F) Plan. As a result of closing the local funds, their membership is aging. At the present time most of the membership is retired, with active members representing an ever-decreasing minority.

Initially, there were nearly 50 of these local police and paid fire relief associations. Many years ago, a few local relief associations consolidated into PERA-P&F under special legislation drafted for each association. More recently, in 1987, the Legislature developed a general law procedure (coded as Minnesota Statutes, Chapter 353A) to be used by any police or paid fire relief association that voluntarily elects to consolidate with PERA-P&F. Under these voluntary consolidations, plan administration shifts to PERA’s staff, the State Board of Investment (SBI) invests the association’s assets, and the prior relief association members receive an expanded array of options. Active members can elect the local plan benefits in their entirety or PERA-P&F benefits in their entirety. Deferred pensioners and existing annuitants of the relief association continue to have their benefit as determined by the applicable local relief association laws, but they can elect to have post-retirement adjustments from the time of consolidation forward computed under the SBI Post Fund procedures rather than the escalator in local plan law. Since the general law consolidation procedure passed in 1987, over 40 local police and paid fire relief associations have used that process to consolidate into PERA-P&F.

MFRA Membership Information; Actuarial Condition. Information on the MFRA membership and the special fund’s current actuarial condition is shown in the following table based on the most recent information available. The data is from the December 2001 actuarial valuation. The total membership is 731 individuals including all benefit recipients, deferred pensioners, and active members. Only 84 active members remained on the valuation date, and that number is less now. Individuals can retire from this association at age 50, and under this plan no additional service credit is received after 25 years of service. This service credit cap may encourage members to leave soon after reaching age 50. The demographic information in the actuarial report indicates that the average age of remaining active members was 52.3, which exceeds the plan’s normal retirement age, and the average service of the remaining active members was 26.3 years, which exceeds the maximum length of service credit obtainable under the plan.

It is expected that the next actuarial valuation, for December 2002, will show an unfunded obligation, due to the weak financial markets.

MFRA Actuarial Valuation Data

The Process to Codify MFRA Provisions. The MFRA chapter in Minnesota Statutes is quite recent, having been suggested for coding in 2001. Several years ago, the Minneapolis Police Relief Association (MPRA) had its laws redrafted, and that redraft was coded in statute. The MFRA then sought a redrafting of its laws. MFRA-retained lawyers drafted various proposals and some were introduced during legislative sessions. Some of these proposals were discussed in legislative hearings, but the MFRA decided that benefit enhancements had higher priority and urged the Legislature to focus on benefit enhancements rather than its codification proposal. For example, during the 2000 Legislative Session the MFRA requested that the Legislature delay consideration of its codification proposal to allow time for legislative consideration of its excess-asset-distribution proposal, which would distribute to retirees a portion of assets in excess of 110 percent funding. Delays in the codification effort required drafts to be revised. The proposals were reworked to incorporate newly enacted provisions and any other revisions that the MFRA contended were needed. A constant issue with those drafts was whether the drafts fully and correctly captured the various MFRA special law provisions. At times it was unclear whether a redraft was clarifying existing benefit provisions or whether it was creating benefit improvements, adding cost to the plan.

The review process during 2001 was complicated by intentionally mixing a redraft/codification effort with benefit enhancements and benefit revisions. Because LCPR staff was informed only a few hours before a Commission meeting that the MFRA codification proposal would be added to the meeting agenda in the form of a delete-everything amendment (A01-0297) to the applicable bills, S.F. 1466 (Pogemiller), H.F. 1477 (Mares), only minimal time was permitted for LCPR staff and legislative review of the proposal. Time did not permit producing a staff memo on that amendment or to allow for a thorough LCPR staff review, and only the most obvious cleanup issues were dealt with. Mr. Lawrence Martin, Commission Executive Director, reviewed the delete-everything amendment and noted 34 problem areas with that draft document. Mr. Martin and Mr. Brian Rice, working on behalf of the MFRA, met briefly a few hours before the Commission meeting to discuss those items, and Mr. Martin prepared additional amendments for Commission consideration. The MFRA language that passed the Legislature a few months later during the 2001 First Special Session addressed some of the issues and errors that had been identified, but some errors remained and some policy questions were not considered or addressed.

During the 2002 session, bills were introduced (S.F. 2531 (Pogemiller); H.F. 2695 (Mares)) to address various perceived deficiencies in the 2001 MFRA codification provisions. The bills passed with little review by the LCPR or Legislature as a whole. Unfortunately, there is continuing controversy. Those bills did not completely address the shortcomings in 2001 MFRA legislation, and there is continuing controversy regarding whether all benefit improvements that were in the 2001 and 2002 legislation have been identified.

MFRA and MPRA Board Compensation Provisions. The MFRA and MPRA have board compensation provisions in their law. The MPRA provision is Section 423B.07, which is the authorized fund disbursement provision. In relevant part, that provision authorizes payment of salary to elected MPRA board members not to exceed three units. A unit under MPRA law is one-eightieth (1/80^th) of the salary of a first grade patrol officer. According to the most recent MPRA actuarial valuation on file, a unit was valued at $77.74. Therefore a salary, or three units, is a salary of $233.22 per month, or $2,798.64 per year.

The MFRA provision is Section 423C.03, Subdivision 3. That provision is structured differently than the MPRA provision. Under the MFRA provision, the board president receives a salary of ten percent of the salary of a first grade firefighter; the executive secretary currently receives a salary of 30 percent of the salary of a first firefighter; and all other elected members receive 2.5 percent of a first grade firefighter salary. According to the most recent actuarial valuation on file, the first grade firefighter salary is $72,893. Therefore, at the current time the board president receives a salary of $7,289 per year, the executive secretary receives $21,867 per year, and the other elected board members receive $1,822 per year.

To the best of our knowledge, no other Minnesota public pension fund provides any compensation to board members.

H.F. 520 (Smith); S.F. 618 (Pogemiller) revises the MFRA Board compensation provision (Minnesota Statutes, Section 423C.03) to permit the MFRA Executive Secretary to receive a salary up to 50 percent of the maximum salary of a first grade firefighter, rather than up to 30 percent of that firefighter salary. The increase would be retroactive to August 15, 2002, when the MFRA membership voted to increase this salary to 50 percent of the salary of a first grade firefighter.

Issues raised by the bills are the following:

1. Justification for any Salary. The first issue is not whether there is justification for a salary increase, but whether there is sufficient justification for any salary for the Executive Secretary or any other board members. To the best of our knowledge, these two Minneapolis pension boards (the MFRA and MPRA) are the only Minnesota public pension fund administrations that provide any salary to any board members. In other organizations, such as the Minnesota State Retirement System (MSRS), the Public Employees Retirement Association (PERA), and all of the teacher plans, the board members serve without compensation, although expenses are covered. Those organizations service a far larger membership than that of the MPRA and MFRA.

2. Closed Fund Efficiency Issues. The MPRA, MFRA, and the Minneapolis Employees Retirement Fund (MERF) were closed to new members in 1980 or earlier. The total membership covered by these organizations is falling, and in several years there will be no more than a few dozen active (non-retired) members remaining. Currently, all of these organizations are separate, with separate staff, consultants and lawyers, and investment programs, resulting in a structure that is increasingly inefficient as these organizations dwindle in size. The LCPR may wish to consider that substantially increasing the salary of the MFRA executive secretary and maintaining the existing structure will add to the cost of this organizational problem.

3. Issue of Whether Duties Justify Salary Increase. The issue is whether there is sufficient justification for any revision in the executive secretary’s salary arrangement given the position’s duties. The proposal in these current bills is to revise that arrangement to permit the executive secretary to receive a salary of 50 percent of the first grade firefighter salary rather than 30 percent. That is a substantial increase. The Commission may wish to determine through testimony what the position duties are, and whether there was any substantial change in the duties or responsibilities of the executive secretary on or after August 15, 2002, which might warrant a substantial adjustment in salary.

4. Size of Increase. If the Commission determines that an increase is justified, the issue is the appropriate size of the increase. The MFRA executive secretary’s current salary is $21,867. This would be increased to $36,447, an increase of 66 percent. The Commission may wish to consider a lesser increase.

5. Salary Increase Given Current Budget Situation. The Commission may wish to consider that Minneapolis is facing a severe budget situation and dozens of job layoffs are expected in the Minneapolis Fire Department. Permitting any salary increase for the executive secretary, although that salary is paid through MFRA special fund assets and not directly from the Minneapolis city budget, could be viewed unfavorably by firefighters and other city employees given the current situation.

6. Incentive for MPRA to Seek Adjustment. The issue is whether an increase in any MFRA board member salary is likely to lead to an MPRA request for an increase in compensation for one or more of their board members.

7. Local Approval, Local Support. The issue is whether a local approval clause should be added to the bills, and whether the city supports these bills. The executive secretary’s salary and those of all other board members is paid from the association’s special fund. The city is responsible for covering the obligations of that fund, with the assistance of considerable state fire aid. We expect in the next MFRA actuarial valuation that the MFRA will have an unfunded liability, due to the action of recent investment markets on the special fund’s asset value.

8. Retroactivity of Salary Increase. The issue is whether there is sufficient justification for increasing the salary retroactively to August 15, 2002, or whether any increase should be prospective only.

Four amendments are attached for consideration.

1. Amendment LCPR03-074. This amendment can be used if the Commission wishes to provide a salary increase that is less than the 66 percent increase proposed in the bills. The following table indicates the amount that needs to be substituted for "50" on page 1 line 14, to achieve the percent salary increase indicated in the second column.

Table 2 Salary Increase Percentages
Percent to Insert on Page 1, Line 14	Resulting % Increase  in Executive Secretary Salary
31.5	5%
33.0	10%
34.5	15%
36.0	20%
37.5	25%
39.0	30%
40.5	35%
42.0	40%
43.5	45%
45.0	50%
46.5	55%
48.0	60%

1. Amendment LCPR03-075. This amendment removes retroactive payment of any salary increase.

2. Amendment LCPR03-076. This amendment can be used to remove retroactive payment of any salary increase and to require local approval.

3. Amendment LCPR03-077. This amendment, an alternative to LCPR03-076, would require local approval, but would permit the salary increase to be paid retroactive to August 15, 2002.