Introduction

As a topic for consideration by the Legislative Commission on Pensions and Retirement during the 2003-2004 Interim, the Commission chair, Representative Steve Smith, has designated a review of the appropriate basis for the allocation of fire state aid.

The interim topic is an outgrowth of proposed pension legislation considered by the Commission during the 2003 Legislative Session, H.F. 427 (Strachan); S.F. 731 (Marko), which would change the manner in which fire state aid is apportioned 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. Because the manner in which fire state aid is apportioned has not been seriously reviewed by the Legislature since the last time the mechanism was revised in 1969, the topic also is ripe for Commission review.

This Commission meeting is the second consideration of the topic by the Commission. The Commission staff expects that full Commission consideration on the topic will require three meetings in total.

This Commission staff issue memorandum is the second issue memorandum for the Commission interim study. This Commission staff issue memorandum presents information on the role that fire state aid and additional volunteer firefighter state aid play in funding firefighter pension programs and the range of fire state aid amounts as a percentage of pension costs, the range of fire state aid amounts per firefighter, and the range of fire state aid amounts per fire run or other measure of fire department activity. The first Commission staff issue memorandum provided general background and historical information about the fire state aid and additional volunteer firefighter state aid programs, to set the stage for further consideration of the topic. The third Commission staff issue memorandum will survey some of the alternative potential bases for allocating state support for firefighters and firefighter pension coverage.

Role That Fire State Aid Plays in Funding Firefighter Pensions

1. In General. Since the creation of fire state aid in Minnesota, in 1885, the primary use for the aid has been the relief of firefighters. Current law, Minnesota Statutes, Section 69.031, Subdivision 5, Paragraph (a), continues that dedication, requiring within 30 days that the municipal treasurer deposit any fire state aid received with the duly incorporated firefighter relief association in the municipality if one is organized and it files a financial report with the municipality. If there is no local firefighter relief association, the fire state aid is required to be deposited into a special municipal account under Minnesota Statutes, Section 69.031, Subdivision 5, Paragraph (a), and expended only for Minnesota fire department association or state volunteer firefighter benefit association dues, the purchase and maintenance of fire equipment, and the payment of construction, repair and maintenance costs of the fire station under Minnesota Statutes, Section 424A.08.

Municipal firefighters have retirement coverage from one or more of three different types of pension plans, either a volunteer firefighters relief association, a local paid firefighters relief association, or the Public Employees Police and Fire Retirement Plan (PERA-P&F). Volunteer firefighter relief associations are governed by Minnesota Statutes, Sections 69.771 to 69.775, and Chapters 424A and 424B. Background information on volunteer firefighter relief associations is presented in Attachment A. Local paid firefighter relief associations were more prominent in Minnesota before 1980, when two dozen existed, but now are represented by two remainder relief associations, the Minneapolis Firefighters Relief Association and the Virginia Fire Department Relief Association. The Minneapolis Firefighters Relief Association is governed by Minnesota Statutes, Section 69.77, and Chapter 423C. The Virginia Fire Department Relief Association is governed by Minnesota Statutes, Section 69.77, and Laws 1953, Chapter 399, as amended. Other paid firefighter relief associations have consolidated with the Public Employees Police and Fire Retirement Plan (PERA-P&F), either under pre-1987 special legislation or under Minnesota Statutes, Chapter 353A, enacted in 1987. Established in 1958, PERA-P&F initially was almost wholly composed of police officers. The PERA-P&F firefighter membership has grown from around 100 members in the 1970s to 1,466 firefighter members in 2001, or approximately 15 percent of the total plan active membership. PERA-P&F is governed by Minnesota Statutes, Sections 353.63 to 353.69.

2. Firefighter Pension Funding Requirements. The funding requirements for firefighter pension coverage are governed by Minnesota Statutes, Section 69.77 (local paid firefighter relief associations), Minnesota Statutes, Sections 69.771 to 69.774 (volunteer firefighter relief associations), or Minnesota Statutes, Section 353.65 (the Public Employees Police and Fire Retirement Plan (PERA-P&F)).

Minnesota Statutes, Section 69.77, requires local paid firefighter relief associations to obtain annual actuarial valuations of the benefits provided by the special fund of the relief association, calculated by a qualified actuary under the entry age normal cost actuarial method, statutory economic actuarial assumptions, and appropriate demographic actuarial assumptions. Based on the actuarial valuation results, the financial requirements of the relief association and the minimum municipal obligation with respect to the relief association are determined. The financial requirements are the total of the normal cost and the amortization (by 2010) contribution/funding surplus credit (for the Minneapolis Firefighters Relief Association) plus the prior year’s administrative expenses increased by 3.5 percent (for the Virginia Fire Department Relief Association). The minimum municipal obligation is the financial requirements of the relief association reduced by the amount of fire state aid expected to be received, the amount of fire insurance premium tax surcharge expected to be received (Minneapolis), the amount of any amortization, supplemental amortization, and additional amortization state aid expected to be received, and the amount of member contributions expected to be deducted in the upcoming years.

Minnesota Statutes, Sections 69.771 and 69.772, relate to volunteer firefighter relief associations that pay lump sum service pensions. The provisions specify the manner in which volunteer firefighter relief association officials are to determine the liability of the relief association special fund and to determine the special fund’s annual accruing liability (i.e. the difference between the current year’s liability and the projected liability with an additional year of service credit, or normal cost). The financial requirements of the relief association are the annual accruing liability, plus any amortization of the unfunded liability created by recent benefit increases (one-tenth of the benefit increase liability), plus the prior year’s administrative expenses of the relief association increased by an inflation factor of 1.035 percent, with that amount reduced by an amount equal to five percent of the relief association’s assets representing expected investment earnings, and reduced by one-tenth of any amount of assets in excess of accrued liabilities. The minimum municipal obligation toward the volunteer firefighter relief association is the financial requirements of the relief association reduced by the amount of fire state aid expected to be received from the State of Minnesota.

Minnesota Statutes, Sections 69.771 and 69.773, relate to volunteer firefighter relief associations that pay monthly service pensions in whole or in part. The provisions require the volunteer firefighter relief associations have an actuarial valuation of the special fund prepared by an approved actuary every four years. The financial requirements of the relief association are the normal cost indicated in the valuation, plus the amortization requirement for any unfunded actuarial accrued liabilities, plus the prior year’s administrative expenses of the relief association increased by an inflation factor of 1.035 percent, and reduced by an amount equal to one-tenth of any amount of assets in excess of actuarial accrued liabilities. The minimum municipal obligation toward the volunteer firefighter relief associations is the financial requirements of the relief association reduced by the amount of fire state aid expected to be received from the State of Minnesota.

Minnesota Statutes, Sections 69.771 and 69.774, relate to independent nonprofit firefighting corporations and their subsidiary volunteer firefighter relief associations. The provisions require that independent nonprofit firefighting corporations providing lump sum service pensions comply with Minnesota Statutes, Section 69.772, and that independent nonprofit firefighting corporations providing monthly service pensions in whole or in part comply with Minnesota Statutes, Section 69.773.

For firefighters covered by the Public Employees Police and Fire Retirement Plan (PERA-P&F), Minnesota Statutes, Section 353.65, governs the member and employer contribution rates. According to the Public Employees Retirement Association (PERA), in fiscal year 2001, 1,421 firefighters in 72 municipalities were covered by PERA-P&F. Attachment B sets forth information on the number of active firefighters covered by PERA-P&F in 2001. The PERA-P&F contribution rates are set by the Legislature in general reference to the actuarial valuation results of the retirement plan and revised by the Legislature periodically as the actuarial condition of the plan changes.

3. The Extent of Fire State Aid Contribution Towards Firefighter Pension Coverage Cost. Although fire state aid is largely dedicated for the funding of firefighter pension cost, the portion of that pension cost actually covered by fire state aid varies considerably, partially because of the varying nature of pension coverage for firefighters, partially because of the varying legacies of past pension funding practices, and partially because of variations in fire state aid.

For volunteer firefighter relief associations providing defined contribution retirement coverage, the pension funding obligation is limited to the administrative expenses of the volunteer firefighter relief associations, with the usual practice of these plans being an equal allocation of any fire state aid (and municipal contribution), without the retirement plan document specifying a particular contribution amount. For volunteer firefighter relief associations providing lump sum service pension coverage, the pension funding obligation is calculated in a very amateur and rough-hewn actuarial manner and the funding must not extend beyond the active member’s average career length in order for the relief association to pay a lump sum retirement benefit, so consequently, the annual funding obligation is relatively large. For volunteer firefighter relief associations providing monthly benefit service pension coverage in whole or in part, the pension funding obligation is essentially an actuarial determination, but the actuarial calculations leading to the determination are infrequent (i.e. every four years or with every service pension increase). For the local paid firefighter relief association (Minneapolis and Virginia), the pension funding obligation is an annual actuarial determination and the annual cost reflects the significant maturity of the two programs. For municipalities with full-time firefighters covered by PERA-P&F, the employer contribution is based on the firefighter’s salary and a statutory employer contribution rate that is periodically revised (last revision in 1999, but likely to be revised in 2004 based on the recently approved PERA-P&F actuarial assumption changes). For municipalities with former paid fire relief associations that consolidated with PERA since 1987, that merged into PERA-P&F in 1999, and that had a significant unfunded actuarial accrued liability, there is an additional employer contribution related to their unfunded actuarial liability in 1999.

Attachment C sets forth a comparison of the total firefighter municipal funding obligation and the total fire state aid received for those municipalities with PERA-P&F-covered firefighters. Attachment D sets forth a comparison of the funding obligations for the various volunteer firefighter relief associations and the total fire state aid received.

Excluding volunteer firefighter relief associations that provide defined contribution service pension coverage, where there is essentially no set funding obligation, the following indicates the situation for the 25 fire state aid recipients where fire state aid pays the greatest portion of firefighter pension funding obligations:

The Extent of Fire State Aid and the Level of Fire Department Function

1. In General. Although fire state aid is currently dedicated for the use of offsetting the employer cost of local firefighter pension coverage, if any exists, the 1969 fire state aid amendments (Laws 1969, Chapter 1001) clearly were intended to improve the quality and function of the state’s various local fire departments. The 1969 amendments required, as a condition of the receipt of fire state aid, a minimum staffing level (a minimum of ten firefighters), the holding of regularly scheduled meetings and frequent drills, the acquisition of a motorized fire truck and various other pieces of firefighting apparatus and equipment, the use of a suitable fire hall, and the existence of a reliable and adequate fire alarm communication system. The specific requirements are to be determined by the State Fire Marshal. The fire department quality and function requirements are coded in Minnesota Statutes, Section 69.011, Subdivision 4.

2. Comparison of the Magnitude of Fire State Aid and the Number of Fire Department Fire Runs. A potential measure of the need for fire department support is the extent of fire runs conducted by the fire department.

• Eden Prairie (#6 in fire state aid, #33 in fire runs);

• Minnetonka (#10 in fire state aid, #26 in fire runs);
• Woodbury (#16 in fire state aid, #62 in fire runs);
• Lake Johanna (#19 in fire state aid, #38 in fire runs);
• Apple Valley (#20 in fire state aid, #73 in fire runs);
• Lakeville (#21 in fire state aid, #32 in fire runs);
• White Bear Lake (#24 in fire state aid, #29 in fire runs); and
• Roseville (#25 in fire state aid, #35 in fire runs).

3. Comparison of the Magnitude of Fire State Aid and the Number of Fire Department "Other" Runs. Another potential measure of the need for fire department support is the extent of other runs undertaken by the fire department, which are presumably first responder or paramedic runs.

• Bloomington (#3 in fire state aid, #28 in other runs);
• Plymouth (#5 in fire state aid, #26 in other runs);
• Eagan (#9 in fire state aid, #37 in other runs);
• Minnetonka (#10 in fire state aid, #42 in other runs);
• Brooklyn Park (#11 in fire state aid, #27 in other runs);
• Spring Lake Park (#13 in fire state aid, #29 in other runs);
• Maple Grove (#14 in fire state aid, #40 in other runs);
• Lake Johanna (#19 in fire state aid, #55 in other runs);
• Apple Valley (#20 in fire state aid, #30 in other runs);
• Lakeville (#21 in fire state aid, #47 in other runs);
• Anoka (#23 in fire state aid, #45 in other runs);
• White Bear Lake (#24 in fire state aid, #58 in other runs); and
• Roseville (#25 in fire state aid, #48 in other runs).

4. Comparison of Fire State Aid and Total Fire Department Runs. Another potential measure of the need for fire department support is the extent of the total activity, fire runs and other runs, undertaken by the fire department.

• Bloomington (#3 in fire state aid, #27 in total runs);
• Plymouth (#5 in fire state aid, #28 in total runs);
• Eden Prairie (#6 in fire state aid, #26 in total runs);
• Eagan (#9 in fire state aid, #34 in total runs);
• Minnetonka (#10 in fire state aid, #42 in total runs);
• Spring Lake Park (#13 in fire state aid, #29 in total runs);
• Maple Grove (#14 in fire state aid, #40 in total runs);
• Lake Johanna (#19 in fire state aid, #56 in total runs);
• Apple Valley (#20 in fire state aid, #30 in total runs);
• Lakeville (#21 in fire state aid, #46 in total runs);
• Anoka (#23 in fire state aid, #45 in total runs);
• White Bear Lake (#24 in fire state aid, #58 in total runs); and
• Roseville (#25 in fire state aid, #47 in total runs).

The Number of Firefighters Compared to Fire State Aid Receipts

1. In General. Fire state aid is largely dedicated for offsetting the cost of firefighter pension coverage, if any exists. Along with the level of the promised level of firefighter benefit coverage, the number of firefighters is a primary influencing factor on the cost of total firefighter pension cost. The number of firefighters also should be a good measure of the need for firefighting services if the fire department is a well-run organization that adjusts its staffing based on its actual service requirements.

2. Comparison of Fire State Aid and the Average Number of Firefighters. A potential measure of the adequacy of the current fire state aid allocation method is the comparison between the relative generosity of fire state aid and the average number of firefighters.

• Burnsville (#12 in fire state aid, #51 in the number of firefighters);
• St. Louis Park (#18 in fire state aid, #319 in the number of firefighters);
• Anoka (#23 in fire state aid, #36 in the number of firefighters); and
• White Bear Lake (#24 in fire state aid, #31 in the number of firefighters).

3. Comparison of Fire State Aid Per Firefighter. Another potential measure of the adequacy of the current fire state aid allocation method is a comparison of the amount of fire state aid per firefighter. The measure is closely related to the comparison of fire state aid and the average number of firefighters.

• Bloomington (#3 in fire state aid, #32 in the amount of fire state aid per firefighter);
• Duluth (#7 in fire state aid, #43 in the amount of fire state aid per firefighter);
• Eagan (#9 in fire state aid, #29 in the amount of fire state aid per firefighter);
• Maple Grove (#14 in fire state aid, #37 in the amount of fire state aid per firefighter);
• St. Cloud (#17 in fire state aid, #34 in the amount of fire state aid per firefighter);
• Lake Johanna (#19 in fire state aid, #28 in the amount of fire state aid per firefighter);
• Apple Valley (#20 in fire state aid, #33 in the amount of fire state aid per firefighter);
• Lakeville (#21 in fire state aid, #39 in the amount of fire state aid per firefighter);
• West Metro Fire Rescue (#22 in fire state aid, #52 in the amount of fire state aid per firefighter); and
• Roseville (#25 in fire state aid, #50 in the amount of fire state aid per firefighter).

Age of Housing Stock Compared to Fire State Aid Receipts

The current distribution of fire state aid relies primarily on two geographic measures, the population and the market value of the property of the area served by the fire department, for the need for fire services. The current allocation method does not appear to factor in the relative age or condition of the housing stock served by the fire department, although the condition of the housing stock clearly contributes to local decisions on the size of a fire department, the need for firefighters, and the magnitude of firefighter pension coverage needed to be provided to attract and retain quality firefighters.

Attachment F contains a comparison of the total amount of fire state aid, the geographic factors largely giving rise to that state aid amount, and the percentage of the housing stock in 2000 that was older than 40 years. The housing stock age figures are taken from 2000 federal census data as contained on the Minnesota State Demographer’s website for the municipality primarily served by the fire department. The census information does not always coincide with firetown boundaries, so the total firetown housing stock information for fire state aid recipients could vary from the information contained in the comparison because additional jurisdictions or parts of jurisdictions are also included in the firetown.

The comparison indicates that the fire state aid recipients in 2002 with the oldest housing stock in 2002 are among the recipients of the least amount of fire state aid, as exemplified by the following information:

• Minneapolis (#1 in fire state aid, #64 in age of housing stock);
• St. Paul (#2 in fire state aid, #85 in age of housing stock);
• Duluth (#7 in fire state aid, #71 in age of housing stock); and
• St. Louis Park (#18 in fire state aid, #273 in age of housing stock).

Method of Structure Heating Compared to Fire State Aid Receipts

The current method for allocating fire state aid also does not specifically factor in any fire hazard that is related to the manner in which the structure is heated. Presumably, structures heated by wood or coal are a more significant fire risk than other methods of heating.

Attachment F contains a comparison of the total amount of fire state aid, the geographic factors that largely underlie that allocation, and the percentage of structures heated by wood or coal. The heating fuel information is from the 2000 federal census, although the information is limited to the primary local government unit located in the firetown.

The comparison indicates that the fire state aid recipients with a significant percentage of structures heated by wood or coal are among the recipients of the least amount of fire state aid, as exemplified by the following:

Duluth (#7 in fire state aid, #311 is wood heat rank) is the highest ranking top 25 fire state aid recipient with the greatest percentage of wood or coal-heated structures, although only six-tenths of one percent of Duluth structures are heated in this manner.

Conclusion

This memorandum is intended to raise questions for Commission members about the policy emphasis contained in the current fire state aid allocation method and to begin a conversation among and with the representatives of the fire service about whether the current allocation method is the most appropriate manner to support the fire service and firefighters pension coverage in Minnesota.

If the information contained in this memorandum and any testimony from fire service representatives results in interest on the part of Commission members for an exploration of the options available to revise the current fire state aid allocation formula, the Commission staff will explore those options in the subsequent Commission staff issue memorandum.