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How'$ Your Fire Relief Association? By Eric Willette hen asked about the local volunteer fire relief associa- tion, many city officials simply shrug their shoulders. The day-to-day operations of the association are ably handled by the fi,refighters. Much of the city s annual financial obligations to the fund are covered by state aid. Pension and investment issues confuse many people and bore others to tears. The financial health of your local fire relief association fund is just as important to your city budget as it is to your volunteer, fire fighters. While having a volunteer, rather than a full-time, fire department may afford substantial savings, your city is ultimately responsible for the cost of supporting the local relief association. And, if you are an ex-officio trustee, you have a fiduciary responsibility to the fund and can be held personally liable for the decisions of the board. In most cases the mayor, the clerk, and the fire chief are ex officio members of the relief association board of trustees. They have full voting powers but cannot be officers of the association. Trustees also have a statutory obligation to make reasonable efforts to obtain the necessary skills and knowledge to carry out their duties. Measuring financial health. The relief association fund's annual financial requirement is calculated by making estimates of future pensions that the fund is obligated to pay to volunteers and the value of assets in the fund (contributions to the fund plus invest- ment returns). If state aid does not cover the annual financial requirement for the fund, your city must levy for the difference. Many factors determine the financial health of the relief association and the need for city contributions including member benefits, state aid payments, and investment returns. Member benefits are the value of pensions promised to past and current volun- teers. When setting benefit levels, trustees should consider the depart- ment's need to attract and retain volunteers, as well as how much the fund and the city can afford to pay out in the long tenn. If the promised benefits exceed available revenues, the city obligation could increase or a long-term deficit could be created. Similarly, the city obligation could increase if current state fire aid is cut or does not grow with benefit increases. While state fire aid has been relatively stable over the past few years, some legislators are interested in cutting this and other pension-related aid programs. Finally, the returns on the fund's investments can dramatically affect the financial health of the fund and the need for municipal contributions to cover expected payments. In fact, the investment returns realized by local funds over the past few years are one reason state fire aid is being scrutinized. Some critics, including a few legisla- tors, believe many local funds' invest- ment strategies are too conservative or too risky. They believe if state are cut and more of the annual financial requirement is paid locally, trustees will have a greater incentive to maximize investment returns without undue risk. They conclude that greater investment returns could lead to higher benefit levels at a reduced cost to both the state and the city. Investment policy must be prudent. State law requires associations to have a written policy that spells out its investment strategy. This policy guides the fund's asset allocation; that is, how investments are divided among bonds, domestic stocks, international funds, and other types of investment. When setting the investment policy and in performing all other association duties, trustees are required by statute to follow the prudent person standard. The statute states trustees must: "act in good faith and shall exercise that degree of judgement and care, under the circumstances then prevailing, that persons of prudence, discretion, and intelligence would exercise in the management of their own affairs, not for speculation, considering the probable safety of the plan capital as well as the probable investment return to be derived from the assets." Not surprisingly, there is wide variation in interpretation of what constitutes a prudent investment policy. Recent legislative scrutiny has compared the investment returns of local associations to the returns of the professionally-managed state plans and the state board of investment. Some legislators think many associations that invest more money in bonds than stocks, for example, are too consbrva- tive in their investment decisions. Legislative proposals for increasing local investment returns include encouraging more fund investment through professional money managers, encouraging or requiring local fund investment through the state board of investment, and setting up a voluntary, independent investment board for local funds. Ex officio trustees must be involved. Whatever your trustees adopt as prudent investment policy and benefit levels for your association, it is vital that your ex officio trustees are involved in the decisions. Remember, any financial shortfall experienced by the fund falls back on the local property taxpayers. And, all trustees can be held individu- ally liable for a breach of fiduciary responsibility by the board, even if they are not actively involved. ~' Eric Willette is legislative policy analyst with the League of Minnesota Cities. SEPTEMBER 1998 MINNESOTA CITIES