H.F. 1334 (Smith); S.F. 1171 (Pogemiller): Providing Increased Interest on Minneapolis Firefighter Relief Association (MFRA) Death Refunds increases the total interest received by beneficiaries who receive an MFRA death refund by permitting interest to be paid based on the first of the month following the date the member contributions were made until the refund is paid, rather than from the first of the month following the death of the member or retiree until the refund payment date.

1. Nature of the Plan; Benefits. The Minneapolis Fire 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 association provides the following from its special fund:

• a salary-related service pension to firefighters retiring at age 50 or older;
• a disability benefit to temporarily or permanently disabled firefighters;
• a survivor benefit to the surviving family of deceased active, retired, or disabled firefighters; and
• a return of contributions to the estate of a deceased active, retired, or disabled firefighter on whose behalf no survivor benefit is payable.

1. The first of these provisions is a standard escalator tied to increases in the salary of a first-grade firefighter. This escalator increases retirement benefits by the same percentage increase as the percentage increase in first-grade firefighter pay.

2. A second increase provision is based on the investment performance of the special fund, and is referred to as the 13^th check post-retirement adjustment. The 13^th check post-retirement adjustment was enacted in 1989.

3. A third post-retirement increase mechanism was added to law in 2000. If the funding ratio of the association exceeds 110 percent, the association is authorized to distribute a portion of the funding in excess of 110 percent of its liabilities to its benefit recipients.

2. Survivor Benefits. The MFRA plan offers two alternative benefit forms that may be used to provide continuing income to a survivor after the death of the firefighter. The first of these is automatic survivor coverage, currently provided under Minnesota Statutes, Section 423C.05, Subdivision 7. Automatic survivor coverage has been a part of this plan for many decades. Currently, that automatic coverage provides a 22-unit survivor benefit (52.4 percent of the benefit received by the retired firefighter immediately prior to the firefighter’s death) if the surviving spouse qualifies as a "surviving spouse member." Joint-and-survivor annuity options were added to the plan in 1997, permitting a retiring firefighter to elect a 50 percent, or 75 percent, or 100 percent joint-and-survivor annuity. By electing the joint-and-survivor coverage the firefighter waives the automatic coverage that would otherwise apply.

3. Surviving Spouse Eligibility, According to Statements in Current Law. Under the definition of "surviving spouse member" (found in Minnesota Statutes, Section 423C.01, Subdivision 25) a surviving spouse member is any spouse married to an active firefighter in death-while-active situations (if death occurs prior to the firefighter terminating from service or retiring). If the ex-firefighter’s death occurs after the individual terminates service with the department, the surviving spouse is a "surviving spouse member" if the marriage occurred at least one year prior to termination of service, according the statement in statute.

A death refund is payable under MFRA law if no survivor benefits are payable. The applicable provision is Section 423C.08, which the current bill would amend. Under current law, if an active, deferred, or retired MFRA member dies an no survivor benefit is payable, the designated beneficiary (or if none, the legal representative of the estate) is entitled to a death refund. The refund is a refund of the employee contributions the individual made to the MFRA special fund, with interest from the first of the month following the date of death until the refund is paid, reduced by the sum of all service or disability pension received. Under H.F. 1334 (Smith); S.F. 1171 (Pogemiller) the refund computation procedure is revised in a way which will significantly increase the total amount of the refund. Rather than computing interest from the date of death (or more specifically, the first of the month following the date of death) the interest will be computed from the first of the month following the date each contribution was made to the pension fund.

A simple example can at least approximately demonstrate the effect of this change. Employee contributions are returned in either case, so the difference between the two treatments is due to the interest amounts. If the current law remains in effect, no annuity has been paid, and the beneficiary applies for the refund almost immediately following the date of death, the interest will be essentially zero.

In contrast, under H.F. 1334 (Smith); S.F. 1171 (Pogemiller), interest is to be computed not from the first of the month following the date of death, but from the first of the month following each member contribution to the pension fund. That will add a significant interest component to the refund. The amount of that interest component will vary with the individual circumstances, but it is likely to be substantial. If a member has a long career of 25 years prior to death, a rough approximation of the interest effect can be obtained by assuming all interest is computed from the approximate mid-point of this period (13 years). A dollar invested 13 years ago at five percent interest (the interest rate specified in the law) is now worth $1.88. Thus, it is reasonable to conclude that the revised refund procedure in H.F. 1334 (Smith); S.F. 1171 (Pogemiller) may approximately double the size of any amount to be refunded. If the first-grade firefighter salary on average was $40,000 over the period, and the employee paid the required 8.0 percent contribution over a 25-year period, the total employee contributions would be $80,000 ($40,000 x .08 x 25). With interest, the total refund might be in the range of $150,000. If the individual had begun to receive a pension, either a service pension or disability pension, any amounts received through the pension benefits would be deducted from the refund amount.

H.F. 1334 (Smith); S.F. 1171 (Pogemiller) would make the MFRA death refund provision consistent with a provision governing police and paid fire relief associations in general, Section 423A.18. No death refund provision is found in the Minneapolis Police Relief Association (MPRA) chapter of statutes, suggesting that the MPRA is currently subject to Section 423A.18. This further suggests that the proposal in H.F. 1334 (Smith); S.F. 1171 (Pogemiller) will create greater consistency between the two local Minneapolis relief associations.

H.F. 1334 (Smith); S.F. 1171 (Pogemiller) increases the total interest received by beneficiaries who receive an MFRA death refund, by permitting interest to be paid based on the first of the month following the date the member contributions were made until the refund is paid, rather than from the first of the month following the death of the member or retiree until the refund payment date.

The issues raised by the proposal are as follows:

1. Need for Change. The issue is whether there is sufficient need to change current law. The current death refund provided under existing law may provide a substantial amount of money to individuals who in many cases were not financially dependent upon the deceased. The Legislature is being asked to increase those refunds, when they occur, by substantial amounts. The change would create more consistency between the MPRA and MFRA, assuming that the MPRA is required to follow the requirements of Section 423A.18.

2. General Law Rather Than Special Law Solution. The Legislature has been asked in recent years to address cases where widows of deceased MFRA firefighters were not entitled to surviving spouse benefits because either these spouses did not meet the surviving spouse definition or because the marriage occurred too soon prior to the firefighter’s death. The Legislature addressed an MFRA surviving spouse case in 2000 (Laws 2000, Chapter 461, Article 17, Section 6), and is being asked to address an MFRA surviving spouse situation in two current bills, H.F. 776 (Davnie); S.F. 499 (Skoglund): MFRA; Benefit for a Certain Surviving Spouse. The 2000 legislation provided, and the current Davnie/Skoglund bills seek, an exemption to the surviving spouse definition requirements to permit surviving spouse benefits to be paid. H.F. 1334 (Smith); S.F. 1171 (Pogemiller) provides a way to address these situations through a revision in general law. By enhancing the death refund, there is less need to decide whether to provide an exemption to usual surviving spouse eligibility requirements.

3. Retroactivity Issues. The bills are retroactive to October 25, 2001. This obviously is an attempt to ensure that a specific case is covered under this legislation, perhaps the same individual who is covered under H.F. 776 (Davnie); S.F. 499 (Skoglund). In any event, presumably the LCPR will need to hear some testimony on that retroactive request to determine its nature and to decide if there is merit in providing retroactivity. The general concern is that providing retroactivity on a benefit improvement will erode the presumption against retroactive application of pension legislation, which could greatly increase the cost of making any change in pension plan benefits or structure.

4. Plan Cost Implications; Post-Retirement Implications. Enhancing death refunds will add to plan liabilities. While that cost is not likely to be great, there is no estimate of that cost. Enhanced death refunds will also impact all other current MFRA benefit recipients, although the impact on any given benefit recipient is not significant. The MFRA provides certain post-retirement adjustments that are a distribution of a specified percentage of fund assets. Increasing death refunds will lower fund assets, reducing somewhat the amount allocated to annuitants through the 13^th check and any other post-retirement asset distribution provision.

5. Local Approval Issues. The LCPR may wish to determine whether the MFRA and the city support this legislation. The Legislature typically does not take action on a matter that is not supported by the applicable city. The LCPR may also wish to consider adding a local approval clause to the bills since Minneapolis is responsible for funding its police and paid fire relief associations.

6. Actuarial Condition. The MFRA actuarial condition is shown below. The most recent data on file is for December 31, 2001. The December 31, 2002, results are expected by show a deterioration due to continued weak investment markets, and it is expected the fund will show an unfunded liability in the more recent valuation.

If the Commission wishes to take any action on H.F. 1334 (Smith); S.F. 1171 (Pogemiller), the Commission may wish to consider the following amendments.

1. LCPR03-095. This amendment removes the intent section, replaces the effective date section with a local approval provision, and removes the retroactive application.

2. LCPR03-096. This amendment removes the intent section, replaces the effective date section with a local approval provision, and retains the retroactive application.