H.F. 427 (Strachan); S.F. 731 (Marko) amends Minnesota Statutes, Section 69.021, Subdivisions 7 and 8, which governs the manner in which fire state aid is apportioned and defines the population basis for use in apportioning one-half of the fire state aid, by shifting the population determinant from solely the decennial federal census to one of four population counts, either the most recent census, any special U.S. Census Bureau census, the annual Metropolitan Council population estimates, or the annual State Demographer population estimates.

1. Program Creation

The fire state aid program was established in 1885 (Laws 1885, Chapter 187). The last major substantive revision in the manner of allocating the fire state aid occurred in 1969 (Laws 1969, Chapter 1001) when the current population-property value allocation method was introduced. Before 1995, the last major revision in the insurance premium tax rates underlying the fire state aid program occurred in 1988 (Laws 1988, Chapter 719, Article 2, Sections 1 through 5) when the fire and related insurance premium tax rates were reduced for certain mutual insurance companies. Before 1995, the last major revision in the amount of state tax revenue available for allocation as fire state aid occurred in 1991 (Laws 1991, Chapter 291, Article 13) when the appropriation for the fire state aid program was reduced to the amount of the insurance premium taxes raised.

2. Pre-1995 Fire Aid Funding

Before 1995, the fire state aid program was financed from the dedicated proceeds of a generally applicable two percent premium tax on fire, lightning, sprinkler damage, and extended coverage insurance on property located within the state. Minnesota Statutes, Section 60A.15, Subdivision 1, imposed a premium tax on fire and related insurance of two percent for most insurance companies, and one-half of one percent for town and farmer's mutual insurance companies and mutual property and casualty insurance companies with assets less than $1.6 billion. The fire state aid under Minnesota Statutes, Section 69.021, Subdivision 5, Paragraph (b) was funded by an appropriation equal to the amount of fire and related insurance premium taxes collected. Half of the total fire state aid amount was distributed in proportion to the population according to the last federal census and half was distributed in proportion to property market values, excluding mineral values but including tax-exempt property. This allocation method reflected an assumption that local property values and population relative to the whole state reflect the relative need for fire protection services.

3. 1995 Premium Tax Increase

The 1995 Omnibus Tax Bill, Laws 1995, Chapter 264, increased the various insurance premium taxes and also increased the revenue available for the fire state aid program. Laws 1995, Chapter 264, Article 9, Section 3, amending Minnesota Statutes, Section 60A.15, Subdivision 1, increased the insurance premium tax rates for town and farmers' mutual insurance companies and for mutual property casualty companies with assets no greater than $1.6 billion. The pre-1995 insurance premium tax rate for these mutual insurance companies was one-half of one percent of the amount of all premiums. The rate was increased by the 1995 Legislature to two percent of all life insurance premiums, one percent of all other insurance premiums for all town and farmers' mutual insurance companies and for the smaller mutual property and casualty companies (assets of no more than $5 million) and 1.26 percent of all other insurance premiums for the larger mutual property and casualty companies (assets over $5 million and no greater than $1.6 billion). Laws 1995, Chapter 264, Article 9, Section 5, amending Minnesota Statutes, Section 69.021, Subdivision 5, increases the insurance premium tax revenue dedicated to the fire state aid program and the police state aid program. For the fire state aid program, the dedicated revenue is increased from the amount of insurance premium taxes collected on fire, lightning, sprinkler leakage, and extended coverage insurance, to the greater of either 107 percent of the fire, lightning, sprinkler leakage, and extended coverage insurance premium taxes collected or an amount equal to one percent of the fire, lightning, sprinkler leakage, and extended coverage premiums written by town and farmers' mutual insurance companies and by mutual property and casualty companies with assets not exceeding $5 million and to two percent of the fire, lightning, sprinkler leakage, and extended coverage premiums written by all other fire risk insurers.

4. 1996 Minimum Fire State Aid Provision

Minnesota Statutes, Sections 69.021, Subdivision 7, and 423A.02, were amended in 1996 to implement a minimum fire state aid floor for volunteer firefighter relief associations that currently receive a disproportionately small amount of fire state aid on a per active member (1993 count) basis. The state aid floor is funded from sources other than the insurance premium tax structure. Thirty percent of any unallocated amortization or supplemental amortization state aid (caused by payment of a 13th check by the Minneapolis Police or Minneapolis Fire Relief Associations, or by a police or paid fire relief association or consolidation account reaching full funding) is to be used to establish a minimum fire state aid amount for volunteer fire relief associations. The aid is to be allocated to the relief associations so that all municipalities or fire departments with volunteer firefighter relief associations receive in total at least a minimum fire state aid amount per 1993 active volunteer firefighter, based on a maximum of 30 firefighters. The amount of the minimum fire state aid is a function of the amount of the funding available.

H.F. 427 (Strachan); S.F. 731 (Marko) proposes an acceleration in the recognition of population changes over time in the fire state aid program, from every ten years with the decennial federal census to annually with the use of one of four alternative census counts or population estimates.

There are several pension and related public policy issues that may merit Commission consideration and discussion, as follows:

1. Appropriateness of Earlier Recognition of Advantageous/Disadvantageous Population Changes. The policy issue is the appropriateness of reflecting in fire state aid apportionment earlier than every ten years population changes among municipalities. The earlier recognition will benefit municipalities and fire towns that are increasing in population and will work to the detriment for municipalities and fire towns that are losing population. Any changes would be reflected in each decennial census under current law, so the issue is the speed with which these changes will be incorporated into the program. Since the authors represent areas that most likely are increasing in population, it can be assumed that the beneficial impact of an acceleration of the population change reflection in the apportionment formula is a major motivation for this proposed legislation. For every municipality or fire town that benefits form the acceleration, at least one other municipality or fire town will suffer an earlier aid decrease. To provide a sense of the trends potentially accelerated by the proposed legislation, the following compares the 4/1/2001 (most recent) State Demographer estimates with the 2000 Federal Census numbers for four fast growing cities (metro suburban) and for four cities with likely declining populations (rural), plus relevant fire state aid and firefighter data:

2. Accuracy of the Use of Estimates in the Fire State Aid Program. The policy issue is the accuracy of population estimates made by the Metropolitan Council or by the State Demographer and the impact of those estimates on fire state aid apportionments. The Commission may wish to take testimony from the Metropolitan Council and from the State Demographer about the methods used to make their population estimates and the reliability of those estimates. There are in excess of 700 fire towns that receive fire state aid, so the estimation process needed to achieve accuracy over a wide number of jurisdictions is potentially more complicated or difficult than making a statewide estimate.

3. Continuing Appropriateness of Using Population and Property Value as the Fire State Aid Allocation Basis. The policy issue is the appropriateness of continuing to use a combination of population and property values as the basis for the allocation of fire state aid. The current allocation method, introduced in 1969 after a long special interim study that involved the stakeholders, is a definite improvement over the prior (pre-1969) method, which attempted to return fire insurance premium tax receipts back to the geographical area. The allocation method, however, relies totally on population and property value as measures of the relative need for fire services and the retention of fire personnel and those two factors may not capture the totality of fire service and personnel needs. The amount of fire state aid receipts vary considerably under the population and property value method, from a low of $214 for Revere in Redwood County to a high of $241,141 for Edina in 2001. The fire state aid allocation method, after almost 25 years, may merit from a detailed interim study, and a review of potential additional measures manners of fire risk, such as the age of the housing stock, the geographic density of fire service areas, and the presence or absence of fire sprinklers.