Summary of H.F. 2376 (Rhodes); S.F. 2220 (Kelley)

H.F. 2376 (Rhodes); S.F. 2220 (Kelley) amends First Special Session Laws 2003, Chapter 12, Article 12, Section 3, by extending the Marshall Volunteer Firefighter Relief Association special deferred service pension interest determination demonstration project to also include the Hopkins Volunteer Firefighter Relief Association. It would permit the Hopkins Volunteer Firefighter Relief Association to pay interest on deferred lump sum service pensions in an amount based on the relief association total rate of investment return as reported by the Office of the State Auditor, but not to exceed five percent annually.

Background Information on Minnesota Volunteer Firefighter Relief Associations

In Minnesota, volunteer firefighters typically have pension coverage as part of their compensation package and that pension coverage is provided by the various local volunteer firefighter relief associations. These volunteer firefighter relief associations are creatures of state law and are subject to various additional statutory regulations.

Under Minnesota Statutes, Section 424A.001, Subdivision 4, volunteer firefighter relief associations are required to be nonprofit corporations organized under Minnesota Statutes, Chapter 317A, the Minnesota Nonprofit Corporation Act. Minnesota Statutes, Chapters 69 and 424A, contain the additional regulation. A volunteer firefighter relief association is governed by a nine-member board of trustees, composed of the city mayor, the city finance manager, the municipal fire chief, and six elected firefighters. Minnesota Statutes, Section 424A.05, requires that every relief association establish and maintain a special fund. The special fund is the fund from which volunteer firefighter pension benefits are payable and into which state aid, municipal contributions, and other public money is deposited.

Minnesota Statutes, Chapter 424A, the primary statutory regulation, consists of specifying certain minimum eligibility requirements and certain benefit maximums, with the actual benefit plan assembled in the articles of incorporation or the bylaws of the particular volunteer firefighter relief association. The primary benefit coverage provided by a volunteer firefighter relief association is the service pension coverage, and the minimum eligibility requirements and benefit maximums largely relate to the service pension coverage. Minnesota Statutes, Section 424A.10, requires a volunteer firefighter relief association that pays a lump sum service pension to pay a supplemental benefit from the relief association special fund to retiring firefighters who receive a lump sum service pension. The supplemental benefit is an amount equal to ten percent of the lump sum service pension paid, up to $1,000. The supplemental benefit is reimbursable to volunteer firefighter relief associations annually, in March, from the State General Fund by the Commissioner of Revenue.

The funding of volunteer firefighter relief associations is governed by the 1971 Volunteer Firefighter Relief Association Financing Guidelines Act, coded as Minnesota Statutes, Sections 69.771 through 69.775, and it requires annual municipal contributions if fire state aid is insufficient to fund the determined annual financial requirements of the volunteer firefighter relief association.

Background Information on Deferred Volunteer Firefighter Relief Association Service Pensions and the 2003 Marshall Volunteer Firefighter Relief Association Legislation

Volunteer firefighter relief associations pay a service pension as the pension plan’s primary retirement benefit when a member volunteer firefighter terminates active firefighting service, attains the required age (at least age 50), and has credit for the required minimum years of firefighting service (at least five years of service credit; potentially 20 years of service credit) and relief association membership. For a volunteer firefighter who has completed the length of service credit required for vesting, has at least five years of relief association active membership, but separates from active volunteer firefighter service and volunteer firefighter relief association membership before age 50 (or older if the relief association requires a later retirement age), Minnesota Statutes, Section 424A.02, Subdivision 7, provides for a deferred service pension that is payable when the former firefighter reaches at least the retirement age. The deferred service pension is calculated based on the law in effect when active service terminated. If the service pension amount has increased since the deferred member terminated active service, the deferred service pensioner does not benefit from the service pension amount increase.

Before 2000 (Laws 2000, Chapter 461, Article 15, Section 6), the relief association was permitted to pay interest on a deferred lump sum service pension at the rate actually earned by the relief association, but not to exceed the five percent interest rate actuarial assumption underlying lump sum volunteer firefighter relief association funding. In 2000, in legislation requested by the Minnesota Area Relief Association Coalition (MARAC), an educational organization representing volunteer firefighter relief associations, the lump sum deferred service pension interest provision was modified, to encompass three options. If the relief association bylaws so provide, interest can be provided on a lump sum deferred service pension at the actual rate of interest earned if the deferred pension amount is placed in a separate relief association account established for that purpose, at the actual rate of interest earned if the deferred pension amount is invested in a separate investment vehicle held by the relief association, or at a flat five percent interest rate.

In 2003, displeased with the 2000 deferred service pension changes, the Marshall Volunteer Firefighter Relief Association sought a legislative change to replicate the pre-2002 law change. Ultimately, the Marshall Volunteer Firefighter Relief Association general law request was converted into a special law (First Special Session Laws 2003, Chapter 12, Article 12, Section 3), which included the additional specification of the manner in which the relief association investment earnings are to be calculated. The Marshall Volunteer Firefighter Relief Association, as a demonstration project, is permitted to pay interest on its lump sum deferred service pensions based on the actual investment performance of the relief association special fund, up to five percent annually. The actual investment performance is that reported by the Office of the State Auditor under Minnesota Statutes, Section 356.219.

Background Information on the Hopkins Volunteer Firefighter Relief Association

The Hopkins Volunteer Firefighter Relief Association is one of Minnesota’s 700+ volunteer firefighter relief associations.

As of December 31, 2002, the most recent available financial and actuarial information from the Office of the State Auditor, the Hopkins Volunteer Firefighter Relief Association provided a lump sum service pension of $5,500 per year of service credit to retiring firefighters. The relevant financial and actuarial information for the Hopkins Volunteer Firefighter Relief Association as of December 31, 2002, is as follows:

Discussion of H.F. 2376 (Rhodes); S.F. 2220 (Kelley)

H.F. 2376 (Rhodes); S.F. 2220 (Kelley) extends the 2003 Marshall Volunteer Firefighter Relief Association deferred service pension demonstration project to include the Hopkins Volunteer Firefighter Relief Association, allowing the payment of interest on deferred lump sum service pensions based on the actual investment return of the relief association, but not to exceed the rate of five percent annually.

The proposed legislation raises several pension and related public policy issues that may merit Commission consideration and discussion, as follows:

1. Appropriateness of General Law or Special Law Solution. The policy issue is the appropriateness of additional special legislation for one volunteer firefighter relief association when the authority sought by the Hopkins Volunteer Firefighter Relief Association may be desired on a more widespread basis and thus should be resolved by general legislation. The 2000 change in the manner in which interest is credited by volunteer firefighter relief associations to deferred lump sum service pensions was requested by the Minnesota Area Relief Association Coalition (MARAC), which contends that it represents the volunteer firefighter community at large, and was intended to allow volunteer firefighter relief associations to pay the actual interest earned by the relief association without requiring an excessive amount of bookkeeping by the relief association administration. Apparently, the volunteer fire community did not universally appreciate the 2000 legislation and at least some volunteer firefighter relief associations seek a return to a procedure that approximates the pre-2000 law. It is unclear how many volunteer firefighter relief associations were benefited by the 2000 law change and how many volunteer firefighter relief associations desire to return to a deferred service pension interest crediting procedure that approximates the pre-2000 law. If there are many volunteer firefighter relief associations in the same situation as the Marshall Volunteer Firefighter Relief Association and the Hopkins Volunteer Firefighter Relief Association, then the special legislation route will become a waste of valuable legislative time and effort and a general law change at an early date would be more appropriate. If general legislation is, or becomes, the better route, Amendment LCPR04-113 provides the applicable language to convert the special legislation into general legislation.

2. Appropriate Duration of the Demonstration Project. The policy issue is the appropriate duration for the 2003 Marshall Volunteer Firefighter Relief Association deferred service pension interest crediting demonstration project if the project is to be extended to the Hopkins Volunteer Firefighter Relief Association. With one relief association as a demonstration project, the existence of the project on an open-ended basis is not particularly problematic and the single fund project will end only if it proves unworkable. With more relief associations added to the Marshall Volunteer Firefighter Relief Association, some decision date on the viability of the provision probably should be considered. Amendment LCPR04-114 sets a December 31, 2005, deadline date for the demonstration projects.

3. Appropriateness of the Hopkins Volunteer Firefighter Relief Association for the Demonstration Project. The policy issue is the appropriateness of the Hopkins Volunteer Firefighter Relief Association for inclusion in the deferred service pension interest crediting demonstration project. Akin to most Minnesota volunteer firefighter relief associations, the Hopkins Volunteer Firefighter Relief Association, as of December 31, 2002, had no unfunded actuarial accrued liability. The plan is 101 percent funded, with fire state aid paying about 30 percent of its total funding requirement, investment performance expected to pay over 60 percent of its total funding requirement, and the City of Hopkins required to pay only about nine percent of its total fund requirement. The inclusion of the Hopkins Volunteer Firefighter Relief Association in the 2003 Marshall Volunteer Firefighter Relief Association demonstration project would constitute a benefit increase of sorts for the Hopkins Volunteer Firefighter Relief Association, with a greater potential financial impact if the special legislation were made retroactive to cover its current deferred retirees. The Hopkins Volunteer Firefighter Relief Association has a large number of current deferred retirees, which may be the relief association’s interest in this issue. However, a change in the deferred service pension interest crediting procedure would not be retroactive to cover existing deferred retirees unless the state law change made it retroactive in its application. The 2003 Marshall Volunteer Firefighter Relief Association demonstration project was not retroactive to cover any existing deferred retirees. If there is interest in making the provision retroactive to cover existing Hopkins Volunteer Firefighter Relief Association deferred retirees, Amendment LCPR04-115 would make the change retroactive to cover existing deferred retirees.

4. Position of the City of Hopkins. The policy issue is the position of the City of Hopkins with respect to the proposed special legislation. Unless the City of Hopkins supports the proposed special legislation and unless the City is likely to approve the special legislation if enacted by the Legislature, it would be an unwise expenditure of Commission and other legislative time and effort to consider the potential proposed special legislation. The Commission will likely request that the City of Hopkins officially express its position on the potential proposed special legislation before scheduling the proposal for legislative consideration.