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HomeMy WebLinkAbout#09 - Cost anaysis SVF plan STAFF REPORT DATE: March 7, 2023 CONSENT TO: City Council FROM: Dustin Kalis, Fire Chief & Michael Schwarz, Relief Association President AGENDA ITEM: Request Cost Analysis to join Statewide Volunteer Firefighter (SVF) Plan REVIEWED BY: Kristina Handt, City Administrator BACKGROUND: The Lake Elmo Firefighters Relief Association Board of Trustees has been reviewing options for retirement plan administration. The Relief Association is currently looking to ask the Minnesota State Board of Investment for a cost analysis for the Statewide Volunteer Firefighter (SVF) fund administered by PERA. ISSUE BEFORE COUNCIL: Should the City Council approve the request for a cost analysis to join Statewide Volunteer Firefighter (SVF) Plan? PROPOSAL DETAILS/ANALYSIS: The Statewide Volunteer Firefighter (SVF) fund is similar to the operations of a Relief Association but is managed by the State of Minnesota through PERA. Participation in the SVF Plan is voluntary and open to fire departments as a replacement of their existing volunteer firefighter service pension plan. The cost analysis is free to the department and does not include any commitment to transfer. The City Council must grant approval to the Secretary of the Relief Association and City Administrator, respectively, to complete the Request for a Cost Analysis to Join the SVF Plan form. At their 2/28/23 meeting, the Lake Elmo Firefighters Relief Association Board of Trustees reviewed the SVF plan and its impact on relief association, voting unanimously to approve the request for a cost analysis to join the SVF plan. FISCAL IMPACT: None. RECOMMEDNATION: If removed from the consent agenda: “Motion to authorize the City Administrator to complete the Request for a Cost Analysis to Join the SVF Plan form.” ATTACHMENTS: 1) Prospective SVF Plan Participant Information 2) SVF Plan Overview Presentation Who Can Participate in the Statewide Volunteer Firefighter (SVF) Plan? Participation in the SVF Plan is voluntary and open to fire departments as a replacement of their existing volunteer firefighter service pension plan. It is also open to departments that do not currently have a service pension plan for their volunteer firefighters. Who Decides Whether a Fire Department Joins the SVF Plan? The fire department’s relief association (if one exists) and governing body jointly make the decision to join the SVF Plan. The fire department may join the SVF Plan if both its relief association (if one exists) and governing body approve pension coverage under the SVF Plan. Common Considerations for Prospective SVF Plan Participants The following is information to consider when deciding whether to join the SVF Plan: 1. The SVF Plan’s assumed investment earnings rate of 6% is higher than the 5% rate set in statute for local relief associations. This means the SVF Plan assumes investment earnings will cover more of the fire department’s annual pension cost than a relief association would assume. The SVF Plan’s higher investment earnings assumption reduces the governing body’s required contribution by more than a relief association’s investment earnings assumption. 2. The year a fire department joins the SVF Plan, the relief association (if one exists) must file one last set of financial reports (as required by law) with the Office of the Minnesota State Auditor and pay for one last audit/attestation. Going forward, ho wever, the relief association is no longer obligated to perform the following duties:  Assemble/file financial reports with the Office of the Minnesota State Auditor.  Pay for an outside audit or attestation.  Invest the assets of the special fund. Professional portfolio managers with the State Board of Investment (SBI) take over this responsibility.  Pay pension benefits and file the paperwork necessary to receive the Minnesota Department of Revenue’s supplemental benefit reimbursement. 3. In most cases, fire departments join the SVF Plan at a benefit level per year of service that is equal to or higher than the relief association’s current benefit level for their volunteers. With the SVF Plan’s assumed investment earnings rate of 6% (rather than the 5% assumed by relief associations), governing bodies are often able to offer volunteer firefighters a higher benefit level without increasing required contributions to the pension. 4. The relief association has less control over the investment of the fire department’s pension assets and the design of the pension plan. 5. Future benefit level increases are at the discretion of the fire department’s governing body, not the relief association. Once a benefit level is established, a governing body cannot unilaterally decrease it. 6. The SVF Plan is a defined benefit, lump-sum pension plan and therefore is not designed to pay annuities on a monthly basis. However, PERA can administer the pension plan for fire departments that currently pay monthly benefits to their volunteers. Instructions for How to Join the SVF Plan 1. By July 15, the Secretary of the fire department’s relief association (if one exists) and the Chief Administrative Officer of the fire department’s governing body jointly complete and submit to PERA a Request for a Cost Analysis to Join the SVF Plan requesting that PERA prepare an analysis estimating the cost of joining the SVF Plan. The board of the relief association (if one exists) and the board/council of the governing body must grant approval to the Secretary and Chief Administrative Officer, respectively, to complete the Request for a Cost Analysis to Join the SVF Plan form. If the fire department is associated with more than one municipality or nonprofit firefighting corporation, the Chief Administrative Officer of each governing body of the fire department must jointly execute the request. 2. Once PERA receives the completed Request for a Cost Analysis to Join the SVF Plan form, PERA staff contacts the fire department and/or the Office of the Minnesota State Auditor to obtain a copy of the relief association’s bylaws (if applicable) and the information needed to prepare the requested cost analysis. PERA collects information on individual volunteer firefighters, including birthdates, years of service, pension vesting status, and the dates on which volunteer firefighters joined and (if applicable) left the fire department. 3. PERA prepares the requested cost analysis free of charge. PERA provides the cost analysis, which includes estimates of future required contributions, to the fire department’s relief association (if one exists) and governing body. 4. PERA notifies the State Board of Investment (SBI) that the fire department is considering joining the SVF Plan. The SBI provides the fire department with information about the SVF Plan investments and about how the fire department may set up an account with the SBI. 5. After receiving PERA’s cost analysis, the fire department’s relief association (if one exists) and governing body have 120 days to approve pension coverage in the SVF Plan. If the relief association (if one exists) and governing body approve pension coverage under the SVF Plan, they provide PERA with written board/council resolutions documenting that approval by November 15. PERA has developed model resolutions that the relief association and governing body may use if they choose to approve pension coverage in the SVF Plan. The relief association (if one exists) and governing body may email their resolutions to PERASVF@mnpera.org. If the relief association (if one exists) and governing body take no action within 120 days, the existing pension coverage continues as before. 6. If participation in the SVF Plan is approved, PERA notifies the SBI. The SBI works directly with the owner of the pension assets to transfer the assets within the year in which the participation in the SVF Plan is approved. Once the pension assets are transferred to the SBI, the relief association’s special fund (if one exists) ceases to exist as a pension fund. Legal title to the assets transfers to the SBI, but the assets will be used exclusively to fund the pension benefits of the fire department’s volunteer firefighters. Transition Steps for the Fire Department’s Relief Association after Joining the SVF Plan The fire department’s relief association may elect to dissolve after the fire department joins the SVF Plan. Alternatively, the relief association may choose to continue as an organization and maintain its general fund. If the relief association chooses to continue, Minnesota Statutes 353G.06, subdivision 2, stipulates that, following the date on which participation in the SVF Plan is effective, the relief association:  Must reduce its board of trustees to five members, comprised of the fire department’s fire chief and four trustees elected by and from the relief association membership;  May maintain a general fund only, which continues to be governed by Minnesota Statutes 424A.06;  Is not authorized to receive any fire state aid or municipal funds. The Minneso ta Department of Revenue sends future fire state aid directly to PERA to be deposited in the fire department’s SVF Plan account; and  May not pay pension benefits; going forward, the relief association may pay exclusively for items authorized under its general fund. The relief association must update its bylaws to reflect the changes listed above. The relief association must also maintain a record of its amended bylaws, but need not file them with any government agency. The relief association will also likely need to amend its articles of incorporation and file the changes with the Minnesota Secretary of State. As nonprofit corporations, relief associations will continue to have annual renewal obligations with the Minnesota Secretary of State and may have an annual obligation to file Form 990 with the Internal Revenue Service. These obligations are best discussed with an attorney. Statewide Volunteer Firefighter (SVF) Plan Minnesota State Statute 353G Public Employees Retirement Association SVF Plan: Defined Benefit, Lump-sum Pension Participation is voluntary and open to volunteer fire departments as a replacement of their existing pension plan. It is also open to volunteer fire departments that do not have a pension plan. SVF Plan Participants SVF Plan offers pension coverage to all existing relief associations as well as departments without a pension plan. 2022 Membership Members 5,400 SVF Plan began in 2010 with six departments. Today there are 204 departments enrolled. ADVANTAGES AND DISADVANTAGES Potential Advantages for Volunteer Fire Departments Relief from annual financial reporting/audit requirements Relief from responsibility for pension plan administration Comparable or higher pension benefits without increasing cost Leverage the expertise of the State Board of Investment Minimal administration and investment fees Loss of local control over pension plan Future benefit level increases are at the discretion of the fire department’s governing body, not the relief association Potential Disadvantages for Volunteer Fire Departments PLAN FUNDING AND ADMINISTRATION The fire department’s SVF Plan pension will be funded by: Existing pension assets of the fire department Annual fire state aid Required or voluntary contributions Investment earnings Funding Funding: Role of the State Board of Investment The State Board of Investment allocates the SVF Plan assets among the following investment categories at the percentages indicated: Fixed Income 45% Cash 5% Domestic Stock 35% International Stock 15% SVF Plan Investment Returns 6/30 Fiscal year-end annual return 2018 5.83% 2019 7.34% 2020 4.22% 2021 20.8% 2022 (12.70)% 5-year rate of return 5.2% Funding: Role of the State Board of Investment SVF Plan Investment Returns 12/31 Calendar year-end annual return 2017 13.19% 2018 (3.71)% 2019 18.27% 2020 14.7% 2021 9.67% 5-year rate of return 10.3% Annual Costs PERA fees: $30 per firefighter per year* (includes active and deferred firefighters) Investment fees: $0.06 per $1,000 invested (6/10ths of 1%) *PERA plans to adjust this fee effective January 1, 2024 SVF Plan Governance PERA Board of Trustees/Executive Director: Policymaking Management Administration SVF Plan Governance The SVF Plan Advisory Board provides advice and guidance to PERA SVF Plan Advisory Board Members Number Appointed By City Representatives 2 League of Minnesota Cities Township Representative 1 Minnesota Association of Townships Fire Chief 1 Minnesota State Fire Chiefs Association Firefighters 2 Minnesota State Fire Chiefs Association Firefighters 3 Minnesota State Fire Department Association State Auditor Representative 1 Office of the Minnesota State Auditor STATE STATUTE AND INTERNAL REVENUE CODE PROTECTIONS … No assets of a public pension plan may be loaned or transferred to the state or a governmental subdivision or be used to amortize an unfunded actuarial accrued liability in another public pension plan or fund. Minnesota State Statute 356.63(a) … it is impossible…for any part of the corpus or income to be…used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries IRC 401(a)(2) Exclusive Benefit Rule ENROLLMENT Who makes the decision to enroll in the SVF Plan? Enrolling in the SVF Plan is a joint decision between the fire department’s relief association and governing body. A fire department’s governing body is a municipality, independent nonprofit firefighting corporation, or joint powers entity. Steps to enroll: Request a cost analysis* from PERA by July 15. To prepare this cost analysis, PERA will need the following information about the fire department: members’ ages, years of service, start/end dates with fire department potential benefit levels potential vesting schedule(s) existing assets * Email requests to PERASVF@mnpera.org. Step 1 What information does PERA’s cost analysis provide? PERA’s cost analysis will: Estimate the annual cost of the fire department participating in the SVF Plan at different benefit levels Estimate the required contribution that would be owed by the governing body to the SVF Plan at different benefit levels This cost analysis is an opportunity for you to explore different benefit levels for your fire department’s pension. Enrollment The fire department’s governing body and its relief association’s board of trustees submit resolutions to join the SVF Plan to PERA by November 15. Step 2 Enrollment The State Board of Investment (SBI) works with the owner of the pension assets to establish an account with the SBI and to transfer the pension assets prior to the end of the calendar year. Step 3 SVF Plan pension account is effective January 1 Establishment of Account If eligible, the governing body of a fire department in the SVF Plan may elect to terminate their participation in the SVF Plan. The eligibility and process for terminating participation is governed by Minnesota Statutes 353G. Electing to Terminate Participation in SVF Plan THE FUTURE OF THE RELIEF ASSOCIATION In the year it approves pension coverage in the SVF Plan, the relief association files one last financial report and audit with the State Auditor pension division. The membership may choose to maintain or dissolve the relief association. Relief Association Board membership limited to five people Maintain a general fund only The relief association no longer pays pension benefits Fire state aid and governing body contributions go to PERA Relief association must update bylaws to reflect the changes If Relief Association Maintained SVF PLAN PENSION BENEFITS Benefit Levels $100 increments $15,000 $900 $800 $700 $600 $500 Governing body sets benefit level Benefit levels range from $500 to $15,000 per year of service credit The governing body can approve an increase in the fire department’s benefit level once per year. Benefit level increases approved in a given year are effective on January 1 of the next year. Upon request, PERA provides the governing body and fire chief with a benefit level cost analysis to help determine an appropriate increase amount. At any time, the fire chief or the governing body can request a benefit level cost analysis from PERA (email requests to PERASVF@mnpera.org). Increasing the Benefit Level after Joining Vesting Schedule Choices A fire department joining the SVF Plan must choose one of three vesting schedules. The fire department may NOT select a vesting schedule that requires more years of service for firefighters to become partially or fully vested compared to the relief association’s vesting schedule. Vesting Schedule: Option 1 Years 5 6 7 8 9 10 11 12 % Vested 40%44%48%52%56%60%64%68% Years 13 14 15 16 17 18 19 20 % Vested 72%76%80%84%88%92%96%100% Vesting Schedule: Option 2 Years 5 6 7 8 9 10 % Vested 40%52%64%76%88%100% Vesting Schedule: Option 3 Years 10 11 12 13 14 15 % Vested 40%46%52%58%64%70% Years 16 17 18 19 20 % Vested 76%82%88%94%100% Who is eligible to collect their pension? Minimum age of 50 years old Service meets fire department’s minimum vesting requirement* Separated from service for a minimum of 30 days * Service is defined by each fire department, not by PERA How does a firefighter collect their pension? Complete and submit to PERA a SVF Plan pension application form (available on PERA’s website at https://mnpera.org /). PERA processes the application form and pays out the SVF Plan pension benefit. Benefit Example Sunfish Fire Department 50-year-old firefighter 20 years of service $800 benefit level Vesting schedule: 100% vesting at 20 years 20 years x $800 x 100% = $16,000 Benefit Example Sunfish Fire Department 50-year-old firefighter 8 years of service $800 benefit level Vesting schedule: 52% vesting at 8 years (100% at 20 years) 8 years x $800 x 52% = $3,328 Survivor Benefits Succession 1. Spouse 2. Minor children 3. Estate Supplemental Benefits 10% of lump-sum benefit amount (Maximum $1,000) PERA is reimbursed by Minnesota Department of Revenue under Minnesota State Statute 424A.10 20% of lump-sum benefit amount, if a survivor benefit (Maximum $2,000) DEFERRED PENSIONS Firefighters Who Defer Their Pension AFTER Fire Department Joins SVF Plan When the firefighter eventually collects their deferred SVF Plan pension benefit, the benefit amount is calculated as: [$ benefit level in effect at the time of deferral *years of service * vested %] No interest is earned on deferred benefits under the SVF Plan. Firefighters Who Defer Their Pension BEFORE Fire Department Joins SVF Plan If a firefighter deferred prior to the fire department joining the SVF Plan, the rules of the relief association will apply to the calculation of their pension benefit. In other words, PERA will calculate the firefighter’s pension benefit according to the relief association’s vesting requirements, benefit level, interest earnings, and retirement age applicable at the time the firefighter deferred. TAXABILITY: QUALIFIED PLAN A lump-sum payment to firefighter requires 20% federal tax withholding. Taxability MN state taxes are required to be withheld for MN residents. Benefit can be rolled over to another tax-qualified account with no federal or MN state withholding. SVF PLAN ONGOING ACTIVITIES PERA Deposit fire state aid into fire department’s SVF Plan account Process pension applications and pay out pension benefits Apply for and pay out supplemental benefits Provide annual pension reports, benefit level cost analyses (upon request), and other SVF Plan news/information to fire chief and governing body Fire Chief Annually certify service credit earned by volunteers in the last calendar year (PERA provides the fire chief with a form to complete this certification process) Review communications/reports PERA sends about the SVF Plan Update fire chief’s contact information with PERA as needed Governing Body Annually apply for fire state aid Review communications/reports PERA sends about the SVF Plan Review/approve increases to pension benefit level Pay required contributions (if any) per invoices issued by PERA Update governing body’s contact information with PERA as needed Governing Body: Required Contributions Required contributions are due from the fire department’s governing body if the combined fire state aid and assumed 6% investment earnings on the department’s pension assets do not cover the annual cost of participating in the SVF Plan. When PERA determines whether the governing body owes a required contribution for a given year, we are statutorily required to assume the annual investment earnings will be equal to a 6% rate of return on the department’s pension assets. Therefore, even when the actual rate of return differs from 6%, PERA’s determination of any required contribution assumes a 6% rate of return. Required Contribution Example* Required contribution for the year: [$50,500 cost –$30,000 assumed return –$20,000 fire state aid] = $500 required contribution *The dollar amounts in this example are for illustrative purposes only and do not represent data specific to your fire department. Cost of fire department participating in SVF Plan for the year $50,500 Fire department’s pension assets $500,000 Assumed 6% return on pension assets: [$500,000 x 6%] $30,000 Fire state aid $20,000 This presentation is intended to provide general information; the rights and obligations of PERA members are governed by state and federal laws, rules and regulations. The Minnesota Legislature or the federal government may change the statutes, rules and regulations governing PERA at any time. If there is a discrepancy between the law governing PERA and the information contained in this presentation, the statutes and regulations shall govern.