TO: Members of the Legislative Commission on Pensions and Retirement

FROM: Edward Burek, Deputy Executive Director

RE: S.F. 625 (Tomassoni); H.F. 474 (Rukavina): Eveleth Police and Fire Trust Fund;
Ad Hoc Post Retirement Increase

DATE: February 28, 2001

Summary

S.F. 625 (Tomassoni); H.F. 474 (Rukavina): Eveleth Police and Fire Trust Fund; Ad Hoc Post Retirement Increase, provides 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, 2001. Local approval is required.

The Eveleth Salaried Firefighters Relief Association and the Eveleth Police Relief Association were 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 was 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.

At the present time, the Eveleth trust fund pays benefits to a small group of individuals, only two retired members and seven surviving spouses of deceased service pensioners. The total annual benefit payout in calendar year 2000 was $114,727. The two service pensioners each received $13,800 annually, or $1,150 per month. Annual survivor benefits for the remaining survivors ranged from $10,245 to $12,090 per year, or from $854 to $1,008 per month. Regarding ages, as of December 31, 2000, the youngest retiree was 89 years old; the other was 93 years old. The youngest surviving spouse was 78 years old while the oldest was 91.

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. That special law was not approved by the City of Eveleth until December 6, 1994, and no significant progress on the amortization of the unfunded liability occurred. In 1995, special legislation was enacted that made the annual payment of the ad hoc post retirement adjustment conditioned on making the required amortization contribution.

In 1998, the Legislature again revised its policy regarding this trust fund, moving to a 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. If the contribution was not sufficient, ad hoc benefit increases granted through special law legislation for 1995 and 1997 were not to be paid. In 1999, another ad hoc benefit increase was granted as a result of bills authored by Senator Janezich and Representative Rukavina (S.F. 103 (Janezich); H.F. 68 (Rukavina)). The benefit increase was rolled into an omnibus pension bill and passed as Laws 1999, Chapter 222, Article 3, Sections 1 and 2. That 1999 legislation also removed the requirement that recent ad hoc benefit increases be rescinded if the city fails to contribute sufficient amounts to cover benefit payments to be made in the succeeding year.

The Eveleth trust fund does not has any mechanism to automatically provide annual benefit increases to retired members and survivors. This would cause 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.

S.F. 625 (Tomassoni); H.F. 474 (Rukavina): Eveleth Police and Fire Trust Fund; Ad Hoc Post Retirement Increase, provides 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, 2001. Local approval is required.

The proposed legislation raises the following issues.

1. Need For Change/Nature Of Change. The issue is whether there is a sufficient need to consider the bill and provide a benefit increase. The Commission may wish to consider that the benefits provided by the trust fund are modest. The trust fund does not have any mechanism to automatically provide increases. There are nine benefit recipients; the youngest is age 78 and four recipients are age 90 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 introduced. 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 retire its obligations, as indicated in those reports. An automatic increase mechanism would create liabilities, and the implications of those liabilities would not be immediately apparent, due to the lack of periodic analysis that 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 ended 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 are two retirees and seven survivors.

Table 2
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. We noted above that the total annual benefit payout under current law is $114,727. With the $100 per month per member increase proposed by the current bill, the benefit annual benefit payout would increase to $125,527. According to a recent letter from Mr. Raymond Eck, the City Clerk for the City of Eveleth, total trust fund assets as of December 31, 2000 were $330,655. The current annual benefit payout, $114,727, or the expected annual benefit payout if the ad hoc benefit increase under S.F. 625 (Tomassoni); H.F. 474 (Rukavina) is granted, $125,527, is a large portion of the total trust fund assets, somewhat in excess of one-third of those assets.

Although payouts are large relative to assets, the city does appear willing to ensure that money is available to meet trust fund payments. Mr. Eck’s letter indicates that the total revenue to the fund from asset earnings and city contributions for calendar year 2000 was $132,269, which is in excess of the payout. Although the legal requirement that the city annually contribute an amount which, together with investment earnings, is sufficient to cover annual payout was removed from law 1999, the information for calendar year 2000 suggests that the city is more than meeting the spirit of that language. The LCPR may also wish to consider 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 near future. The trust fund covers only nine individuals.

3. Appropriate Size Of The Member Increase, And 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, we have noted in past memos for Eveleth trust fund ad hoc increases that 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 as indicated in Mr. Eck’s letter, a $100 per month increase ($1,200 per year) would amount to an 8.7 percent increase for the service pensioners. For the survivor currently receiving the largest survivor pension, a $12,090 annual benefit, a $100 per month increase amounts to a 9.9 percent increase. For the survivor with the lowest current benefit ($10,245 per year) a $100 per month increase creates an 11.7 percent increase.
   
4. Local approval. To ensure that LCPR meeting time is productively used, the Commission has been unwilling to consider local plan benefit increase legislation unless the municipality supports the legislation. A city resolution supporting the resolution is attached.

Technical Amendment. Attached is Amendment LCPR01-13, which would replace the existing local approval language in the bills with local approval language in a form recommended by the Office of the Revisor of Statutes for use in bills requiring local approval.