4.2. SR 07-26-1993 - Laserfiche WebLink

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needs for funds is difficult or impossi- ble, and may result in lost opportunities for returns. Further, in times of substantial infla- e tion, an. association needs to make preservation of the special-fund assets in terms of constant dollars or purchas- ing power a major consideration, if it hopes to accomplish its objectives in an economical manner. Thus some expo- sure to loss is almost inevitable; how- ever, it's likely to be substantially less than for alternative investments. Stocks and other equity investments are subject to substantial fluctuations in value over the short term. A relatively small fund such as the typical volunteer fire relief association needs to consider carefully whether it's appropriate to subject the fund to fluctuations in investment value that are likely if a large percentage of fund investments are in equities or other even more volatile investments. This would be particularly important to the individual firefighter if the relief association's bylaws specify a "defined contribution" benefit system. Under this approach (also known as "split- the-pie"), the pension a retiree receives is calculated as a percentage of the association's assets at the time the firefighter retires, based on the retiree's total years of service com- pared with the total years of service of all the association members. If the relief association were using heavy equity investments, a retiree could be disadvantaged if he or she happened to retire at a time when the stock market was down. Equity investments could also create a problem for the city if the relief association uses a "defined benefit" system, where the association's bylaws spell out the actual number of dollars of pension it pays per year of service. The financial support the city must contribute each year depends on the comparison of the association's accrued liability for pensions with its assets. The city's contribution is defined as a specified percentage of any deficit. If the association's funds are in equity investments, a slump in the value of those investments could create an actuarial deficit. This in turn would trigger a requirement for increased funding from the city. In short, invest- ing the relief association's funds in equities could make the city's annual financial contribution fluctuate, possibly substantially, and thus complicate the city's budgeting problems. This problem could be compounded because of a change in the law several years ago regarding the procedures for increasing benefits. Formerly, the city needed to approve any relief associa- tion benefit increases. Now, however, if an actuarial surplus exists in the relief association, the association can increase benefits without city approval, up to a specified percentage of the surplus.3 Thus, if a relief association's funds were invested heavily in stocks, for example, and the stock market rose dramatically (as it has over the past 18 months), the association would be able to increase its benefit, based on the existing surplus. However, if the stock market then took a dive, it could create an actuarial deficit. Because the city has a statutory obligation to provide funding for actuarial deficits, the city would be left paying for the cost of those increased benefits. This peculiarity in the law as it applies to defined benefit plans would seem to encourage a relief association to engage in risky investment. After all, it would seem big gains can increase benefits, but big losses won't decrease them. But that's not the whole story. Possible personal liability of those who CHEMICAL TESTING FOR HAZARDOUS WASTE Including PCB's In * Transformer Oil * Water * Waste Water * Sludges For More Information Contact ~v ~ MINNESOTA VALLEY TL TESTING LABORATORY. INC. 326 Center St. New Ulm, MN 56073 328 Chester 51. 51. Paul, MN 55107 In Minnesota Call Toll Free: 1.800.782.3557 Outstate Call Collect 507.354.8517 (New Ulm) 612.228.1851 (St. Paul) 32 Minnesota Cities *