H.F. 1293 (Seifert); S.F. 1390 (Frederickson) amends Minnesota Statutes, Section 424A.02, Subdivision 7, which specifies the qualification requirements for a deferred service pension from a volunteer firefighter relief association and specifies the interest payable on a deferred volunteer firefighter service pension, if the volunteer firefighter relief association bylaws permit, by reorganizing the interest payment options and by adding the option for the payment of interest based on the actual investment performance of the relief association, up to five percent per year.

Attachment A provides a general summary of the retirement benefits payable from a volunteer firefighter relief association and their eligibility requirements and applicable maximums. The attachment will serve to put the topic of volunteer firefighter relief association deferred service pensions into the broader context of the benefit coverage provided by volunteer firefighter relief associations.

H.F. 1293 (Seifert); S.F. 1390 (Frederickson) would permit volunteer firefighter relief associations to pay interest on deferred service pensions during the deferred period based on the relief association’s investment earnings, up to five percent annually, as an alternative deferred service pension interest payment procedure to the current options, which are either no interest, five percent interest, or actual investment earnings or losses on a separate account or from a separate investment vehicle.

The proposed legislation raises the following pension and related public policy issues for Commission consideration and discussion:

1. Appropriateness of Encouraging Service Pension Deferrals. The policy issue is the appropriateness of encouraging volunteer firefighters to discontinue active firefighting services and go on deferred service pensioner status by increasing the value of a deferred lump sum service pension. Pension plans operate to assist the personnel system by helping with the recruitment, the retention, and the systematic, predictable, reasonable, and timely out-transitioning of employees. If this change encourages firefighters to end their volunteer firefighting career significantly before age 50, the minimum normal retirement age for volunteer firefighter relief associations under state law, then the requested change may cause or intensify a shortage in some volunteer fire departments. The 2000 deferred service pension interest change, proposed following a long bull market and after significant investment gains, was intended to allow defined service pensioners from volunteer firefighter relief associations to participate in that positive investment performance. This change seems to be motivated by the post-2000 bear market and is intended to allow deferred service pensioners to benefit from a volunteer firefighter relief association’s investment performance without having the downside investment risk that the 2000 legislation provided.

2. Uncertain Procedure for Determining Relief Association Interest Rate. The policy issue is the lack of specificity in the manner in which relief association investment performance is to be determined. The change sets the actual interest earnings of the relief association as the maximum interest payable on deferred service pensions, but the proposal does not specify the calculation method and some relief associations have not reliably calculated their investment performance in the past. The proposed legislation would give the volunteer firefighter relief association board of trustees broad authority to determine the relief association investment performance. It would allow the volunteer firefighter relief association board to use investment performance calculation methods other than a time-weighted total rate of return method, the method used to compare the investment performance between investment professionals, and other than a dollar-weighted total rate of return method, the method used for internal purposes, when cash flow timing differences are not an issue. Some volunteer firefighter relief associations have invested in unusual investments in the past, including those without a readily determinable market value such as limited partnership and venture capital investments. When no market value is reasonably available, any investment performance calculation becomes more susceptible to manipulation. Amendment LCPR03-123 attempts to improve the proposed legislation by requiring the relief association board to use the investment performance calculation made annually by the Office of the State Auditor under Minnesota Statutes, Section 356.219, although the timing of the report of that investment return calculation may not be as timely as some relief associations may desire.

3. Administrative Burden of Calculating Interest Amounts and Investment Performance for Deferred Pensions Over Irregular Periods. The policy issue is the potential problem for relief association boards in having to calculate both deferred service pension interest amounts and relief association investment performance over irregular periods, since volunteer firefighters potentially terminate active firefighting services on employment anniversaries or other random dates and volunteer firefighter birth dates, when retirements tend to occur, also will be largely random, while relief association investment return information is determined annually, quarterly, or potentially monthly, but is unlikely to be determined on a daily basis. Even if the deferred service pension interest rate calculation is a solvable problem with a simple personal computer program or otherwise, the inability to correlate it with the relief association investment performance data for the same period will make the actual investment performance component of the new option difficult to implement.

4. Application to Current Deferred Retirees. The policy issue is whether or not the proposed authority to pay interest on deferred service pensions should be made applicable to current deferred retirees. Pension law generally and the deferred volunteer firefighter relief association service pension law, Minnesota Statutes, Section 424A.02, Subdivision 7, Paragraph (e), specifically, provides that a public pension plan member’s benefit rights are set based on the date on which the member terminates active service. As of December 31, 2001, the most recent available volunteer firefighter relief association information, there were 2,897 deferred retirees or inactive volunteer firefighter relief association members. Unless the provision is explicitly made retroactive to include current deferred retirees, the provision would only apply to volunteer firefighters who terminate active firefighting service after July 1, 2003. If made retroactive, however, a decision will need to be made about whether the change will just apply to current deferred retirees or not and whether the change will also apply to the interest credited for past periods or will only apply to interest credited for future periods. Amendment LCPR03-124 would extend the application of the proposed legislation to include current deferred retirees and allows for interest based on actual earnings, not to exceed five percent, to be paid for deferred periods occurring before July 1, 2003, if the volunteer firefighter relief association bylaws were amended to so provide.