State Auditor Pat Anderson released an annual report recently regarding the investment performance of 679 Minnesota fire relief associations.
The report also includes three salaried police relief associations and one salaried fire relief association. These relief associations manage assets that will provide retirement, disability, and survivor benefits to almost 20,000 volunteer firefighters across Minnesota.
Overall, earnings from investments were the largest source of revenue for relief associations followed by state fire aid, municipal contributions, and other income. In 2004, investment earnings totaled $25.6 million, state fire aid totaled $22.8 million, municipal contributions totaled $7.8 million, and other sources totaled $1.1 million.
During 2004, the relief associations in this report paid benefits totaling almost $20.0 million to 1,221 recipients. This was an average of $16,380 per benefit recipient.
2004 Investment Performance
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The average rate of return for relief associations was only 6.8 percent during 2004. The top relief associations had returns around 13 percent, while 42 relief associations had returns of less than 2 percent. Four relief associations had negative returns during 2004.
In comparison the S&P 500 index, a measure of large U.S. stocks, increased by 10.9 percent and the State Board of Investment Income Share Account increased by 9.2 percent. The relief associations that did the best in 2004 were invested in equities or invested with the State Board of Investment.
Seventy-four relief associations were invested entirely in cash at the end of 2004, while an additional 124 had more than half of their assets in cash. These 198 relief associations with over half of their assets invested in cash had a combined average rate of return for the year of only 3.7 percent. In comparison, the 484 relief associations with less than half of their assets invested in cash had a combined average rate of return of 8.0 percent.
Eight Year Rate of Return
The overall rate of return for reliefs over the last eight years was 5.3 percent. Although the stock market fluctuated greatly over the past eight years, the annualized average return was 8.1 percent. The bond market returned 7.0 percent, while cash returned 3.6 percent. In fact, 136 relief associations did not even exceed the return of cash. The market returns show that there was potential for decent returns over the past eight years.
Another area of concern is that 360 relief associations (over half) did not meet the five percent statutory interest rate assumption over the eight-year period.
State law gives relief associations the authority to invest in the State Board of Investments (SBIs) Supplemental Fund. From 1997 to 2004 the Income Share account returned 7.7 percent. This return is better than what 96 percent of all relief associations were able to return over this time period.
The low rate of return over the last eight years is very troubling, said Anderson.
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West Central Regional Analysis
In the West Central Economic Development Region, the average rate of return in 2004 was 6.12 percent with an average 8-year rate of return of 4.58 percent. The Arrowhead Economic Region includes the counties of Becker, Clay, Douglas, Grant, Otter Tail, Pope, Stevens, Traverse and Wilkin.
Firefighter benefits exceed funds at many fire departments
During 2004, relief associations paid over $19 million in service pensions and nearly $1 million in ancillary benefit payments.
Service pension payments increased from the $18.2 million paid during 2003, while the ancillary benefit payments remained about the same. Ancillary benefits include disability, survivor, and funeral benefits. Over 98 percent of the relief associations offer a survivor benefit, over 85 percent offer a long-term disability benefit, less than 10 percent offer a short-term disability benefit, and less than five percent offer a funeral benefit.
Benefit increases were made by 164 relief associations during 2004, which is nearly one-quarter of the pension plans.
Unfortunately, some of the relief associations that made the largest benefit increases during 2004 were also plans with some of the worst funding ratios. A funding ratio represents the amount of future liability the relief can cover. Sixty of the 164 relief associations that increased their benefit level were underfunded, and 10 had funding ratios below 75 percent, meaning they could only cover 75 percent of the future pension liabilities.
Benefit increases should only be considered once the reliefs assets have covered 100 percent of their future liabilities, said Anderson. Otherwise the taxpayers are at risk.
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Recommendations of the Report
The report also made several recommendations going forward. Chief among these was that most relief associations should strongly consider using the State Board of Investment for their stock and bond investments. Relief associations invested through the SBI did the best, and met or exceeded market returns.
In addition the State Auditor also recommended that municipalities and independent fire department boards take steps to understand the effect that benefit increases have on the financial requirements of the relief association before approving benefit increases. Relief associations with poor funding ratios are strongly discouraged from making benefit increases until steps are taken to improve their funding.
A copy of this report is available for viewing and downloading at:
