H.F. 91 (Rukavina); S.F. 55 (Tomassoni) provides the Eveleth Police and Salaried Firefighter Trust Fund benefit recipients (retired police officers and firefighters who receive service pensions, and surviving spouses) with a permanent ad hoc post-retirement increase of $100 per month, retroactive to January 1, 2003. Local approval is required.

The Eveleth Salaried Firefighters Relief Association and the Eveleth Police Relief Association were both created in 1935 to provide pension coverage to Eveleth salaried firefighters and to Eveleth police officers, respectively. In 1977 (Laws 1977, Chapter 61), the active members of each relief association had their pension coverage transferred to the Public Employees Police and Fire Fund (PERA-P&F), with the pension coverage for any existing benefit recipients of the two relief associations transferred to a joint Eveleth retired police and firefighters retirement trust fund, which is required to be managed by the City of Eveleth.

The coverage transfer for active members was prompted by active member dissatisfaction over the modest benefit coverage provided by the two local relief associations. At the time of the 1977 coverage transfer, the two relief associations provided very modest benefits compared to other local relief associations.

The Eveleth Police and Fire Trust Fund pays benefits to a small group of individuals, consisting of one retired member and six surviving spouses of deceased service pensioners. The total annual benefit payout in calendar year 2002 was $88,350. The service pensioner received $15,000 annually, or $1,250 per month. Annual survivor benefits for the remaining survivors ranged from $11,445 to $13,290 per year, or from $854 to $1,007.50 per month. The retiree is 95 years old. The surviving spouses range in age from 79 years old to 93 years old.

Until 1998, the Eveleth trust fund was required to be actuarially funded. However, contributions sufficient to actuarially fund the benefits provided by the trust fund by the full funding date typically were not made. Under 1982 legislation, the joint trust fund was required to be fully amortized (assets equal to accrued liability) as of December 31, 1991. The trust fund did not meet that amortization target date. In 1993, the amortization target date was reset to December 31, 1998. The City of Eveleth did not approve that special law until December 6, 1994, and no significant progress on the amortization of the unfunded liability occurred. In 1995, special legislation was enacted that conditioned the annual payment of the ad hoc post-retirement adjustment on making the required amortization contribution.

In 1998, the Legislature again revised its policy regarding this trust fund, moving to a current disbursements or "pay-as-you-go" funding approach. The city was required in law, however, to contribute an amount sufficient, given the investment return of the fund, to cover the benefit payments for the coming year.

The Eveleth trust fund does not has any mechanism to automatically provide annual benefit increases to retired members and survivors. This lack of an automatic post-retirement adjustment mechanism would result in the value of any given benefit to erode over time due to the effect of inflation if ad hoc increases were not granted. In response, the Legislature has granted numerous ad hoc benefit increases to the benefit recipients of this trust fund over the years, as follows.

In 1977, the average benefit payable to retired members of the Eveleth Police and Fire Trust Fund was $253.75 per month and the average benefit payable to survivors of the Eveleth Police and Fire Trust Fund was $111.07 per month. With the special post-retirement adjustments enacted in 1979-2001, those average benefits would have increased to $1,153.75 per month for retired members, a 454.68 percent increase and to $1,011.07 per month for survivors, a 910.30 percent increase. Over the period 1977 to 2001, the Consumer Price Index (CPI) increased 284.38 percent. If the average benefits were adequate in 1977, the purpose for the special post-retirement adjustments would be to replace the impact of inflation and the pattern of past increases would be excessive. Since the 1977 level of average benefits were not adequate, which is why the Eveleth Firefighters Relief Association and the Eveleth Police Relief Association were terminated and their active membership shifted to the Public Employees Police and Fire Retirement Plan (PERA-P&F), the past post-retirement adjustments serve the dual purpose of remedying past benefit inadequacies as well as replacing the lost purchasing power from inflation.

H.F. 91 (Rukavina); S.F. 55 (Tomassoni) provides Eveleth police and salaried firefighter trust fund retired members and surviving spouses with a permanent ad hoc post-retirement increase of $100 per month, retroactive to January 1, 2003 upon local approval.

The proposed legislation raises the following pension and related public policy issues:

1. Need for Benefit Change/Nature of Benefit Change. The policy issue is whether or not there is a sufficient need to provide a benefit increase for the Eveleth Police and Fire Trust Fund retired members and surviving spouses. The Commission may wish to consider that the benefits provided by the trust fund are modest and that the trust fund does not have any mechanism to automatically provide for post-retirement increases. There are seven benefit recipients; the youngest is age 79 and three recipients are age 93 or older. In recent years, ad hoc benefit requests have occurred and been granted by the Legislature every other year. When these increases are averaged over two years, the increases amount to less than the percentage increases generated over the last several years for the larger Minnesota public pension plans.

There would be some risk in considering some form of automatic increase for trust fund members, in lieu of the ad hoc Eveleth trust fund proposals which periodically are requested. No actuarial reports are now required for this trust fund, and in the past the city did not make the contributions that the trust fund needed to amortize its unfunded pension obligation, as indicated in those reports. An automatic increase mechanism would create actuarial accrued liabilities, and the implications of those actuarial accrued liabilities would not be immediately apparent, due to the lack of periodic analysis that regular actuarial reports could provide.

2. Financial Solvency of the Joint Trust Fund. The pension issue is the adequacy of the trust fund assets, and the willingness of the city to ensure that the assets are sufficient to meet the benefit payout needs. The most recent data staff has on the trust fund is from the Eveleth Fire and Police Retirees’ Relief Association, Annual Actuarial Valuation, December 31, 1997. The requirement that this trust fund obtain an actuarial valuation was removed from state law shortly thereafter. As noted below, as of December 31, 1997, the trust fund had $213,309 in assets, $583,427 in accrued liabilities, and was 36.6 percent funded. At that time there were three retirees and eight survivors. Currently, there is one retiree and there are six survivors.

Eveleth Trust Fund Actuarial Data

December 31, 1997

	Actuarial Assets	Actuarial Accrued Liabilities	Unfunded Actuarial Accrued Liabilities	Percent Funded
Retirees and Beneficiaries
Retired Members (3)		$138,935
Surviving Spouses (8)		444,492
Surviving Children(0)		0
Total (11)	$213,309	$583,427	$370,118	36.6%
Members with Deferred Benefits (0)	0	0	0	--
Active Members (0)	0	0	0	--
Total (11)	$213,309	$583,427	$370,118	36.6%

The funding ratio shown above indicates that, as of the end of 1997, the remaining liabilities were large relative to the assets on hand. The total annual benefit payout under current law is $88,350. With the $100 per month per member increase proposed bill, the benefit annual benefit payout would increase to $96,750. Although the Commission does not have information on trust fund assets, the current annual benefit payout or the expected annual benefit payout with the ad hoc benefit increase granted is likely to be a large portion of the total trust fund assets.

Although payouts are likely to be large relative to assets, the city does appear willing to ensure that money is available to meet trust fund payments and that the total financial burden on the city is not large. The total payout is modest in size and is likely to decrease in the future. The trust fund covers only seven individuals.

3. Appropriate Size of the Benefit Increase and the Appropriate Design of the Increase. The pension policy issue is the nature of the increase, and its size. The bill follows the pattern established many years ago for this trust fund of providing an identical dollar increase for each benefit recipient, rather than an identical percentage increase. Apparently, this is the approach that the city and presumably the trust fund members prefer. However, this approach results in percentage increases which differ between service pensioners and the survivor group. One can contend that the living costs increase over time in a percentage manner, and an equal percentage increase for all members of the trust fund is a preferable design. Under the fixed-dollar increases that have occurred in the past for trust fund members, and are again proposed in the current bills, the percentage increase will vary by member. Because the current survivors have annual benefits which are somewhat less than the service pensioners, a $100 per month increase creates a larger percentage increase than the service pensioners receive. There are also differences within the survivor group, because the current benefit amounts received within the survivor group varies. Given the current payments to the service annuitants and survivors, a $100 per month increase ($1,200 per year) would amount to an eight percent increase for the service pensioner. For the survivor currently receiving the largest survivor pension, a $13,290 annual benefit, a $100 per month increase amounts to a nine percent increase. For the survivor with the lowest current benefit ($11,445 per year) a $100 per month increase creates a 10.5 percent increase.

4. Local Approval. The policy issue is the extent of support by the City of Eveleth for the proposed legislation. To ensure that Commission time is productively used, the Commission has been unwilling to consider local plan benefit increase legislation unless the municipality supports the legislation.