Committee Minutes

PENSION AND INSURANCE COMMITTEE
Wednesday, April 13, 2005
Council Chambers


The meeting was called to order at 2:00 p.m. by Mayor Brown.

Committee Members Present: Mayor Brown, Mike Flannery, Gerald Hamerlik, Curt
Kreun, Maureen Storstad.
Committee Members Absent: None
Staff Present: John Schmisek, Sherie Lundmark


Mayor Brown announced that if anyone wishes to speak to any issue to please do
so before the vote is taken on that item by asking to be recognized by the
chair, coming to the front podium, and giving their name and address for the
record.


Matter of Approval of Minutes from March 2, 2005 meeting.

Motion by Kreun, Second by Hamerlik to approve the minutes. Aye: All. Motion
Carried.


Matter of Actuarial Valuation Report.

Eric Roling, Deloitte & Touche, reviewed with the Committee the process for
compiling the actuarial report, assumptions used, and basic demographic data of
the plan. He noted that the plan now has a total of 468 participants, of which
270 are still working and 198 are inactive (i.e. retired, terminated but not
yet utilizing benefits, etc.) He noted that the number of inactives will
continue to decrease, as no new employees are entering the plan to offset the
retirements. In reviewing the assumptions, he noted that in prior years, the
report has been compiled with a salary increase assumption of 5%, but this year
the report has been compiled using a 3% assumption. He stated that in
reviewing our historical salary increase and in reviewing the average rates
used by others in the industry, the 3% is a reasonable rate to use for our
plan.

In reviewing the plan assets, Roling noted that at December 31, 2004, the
assets were valued at $35,579,000, a 7.2% increase net of management fees. He
added that without considering the fees, the assets overall performance would
be about the 8.25% which we use in our assumptions. The funding ratio at
January 1, 2005 is 72.4%, which is down slightly from the 2004 funding ratio of
75.7%. Roling explained that this is due to the smoothing method which
recognizes a portion of prior year gains and losses each subsequent year. He
continued that this brings the unfunded liability to $14,458,981, which is
amortized using a 30-year level dollar approach. Roling stated that the total
recommended contribution for this year is $2,097,211, which is up 6.9% from
last year.

Rolling recommended to the committee that they adopt using the 3% salary
assumption that he used in preparing this years report. He stated that he has
researched in industry data and finds that most private pension plans are
currently using a 4 ½% and that public sector is usually lower. Given the
history of our salary increases and the anticipated increases based on our
current salary plan, he stated that he believes that 3% is a more reasonable
rate for us to use. Schmisek concurred that he has also reviewed our
historical data and most of our increases have been 3% or less and that 3%
seems to be a good average looking forward.

Roling stated that there was one more item that he would like to address, the
mortality table that is currently being used in the plan. He explained to the
committee that the current mortality table being used is the 1983 Group
Mortality Table for Males and Females (83GAM). He continued that this table
was compiled from insurance company data and is still being used by a large
number of private and public sector plans, as well as the IRS. He stated that
there are several newer tables that are now available, most of which are based
on actual plan data, rather than insurance company information. He continued
that in the industry we are beginning to see auditors inquiring whether the
continued use of the 83GAM is still valid for their plans. Based on the nature
of our plan participants, Roling stated that in reviewing the new tables that
are available he would recommend the RP-2000 blue collar table, as that data
seems to come from workers with similar background to our plan participants.
Roling added that if we made the change to a new table this year the
recommended contribution would increase by about 9.3% to $2,292,000. Roling
stated that at this time only about 50% of private and 25% of public plans have
changed to newer tables and that he would not advise that we must make a change
this year, but to be aware that the change will be needed within the next five
years.

Roling reviewed with the committee a number of graphs projecting future
recommended contributions through 2015 and the impact that slight changes in
variables would have on the projections.

Hamerlik inquired whether anticipated changes in social security that may lead
to people working past their elected retirement were considered in preparing
this report. Roling responded that they were not, the report was prepared
assuming that people retire at their elected age and if participants did work
past their elected age, it is a benefit to the plan.

Schmisek recommended that the committee make two motions, first to receive and
file the report and a second to change the salary assumption to the recommended
3%. He continued that at this time he would like to continue study on the
mortality table issue prior to making a change to see if a table more focused
on public sector can be found, as it seems that especially in regards to our
public safety participants, our mortality differs from private sector data.

Motion by Hamerlik, Second by Storstad, to receive and file the annual
actuarial report. Aye: All. Motion Carried.

Motion by Flannery, Second by Kreun, to change the annual salary increase
assumption from 5% to 3%. Aye: All. Motion Carried.

Brown inquired when more information on the mortality table issue would be
provided. Schmisek and Roling concurred that within 3 months they could bring
the information back to the committee. Hamerlik inquired whether there was a
possibility of using two tables for the plan, one for public safety and one for
rest of the employees. Roling stated that is also a possibility that can be
explored. Schmisek stated that he would also like to look at our actual
history in the plan, as many of our age 55 election participants are not
retiring at 55 and would be helpful to review actual retirement ages versus
elections. Schmisek added that he believes this research can also be completed
within the three month time period, with information being provided to the
committee at the end of that time.


Matter of Eighth Amendment for Defined Benefit Plan and Fifth Amendment for the
Defined Contribution Plan.

Schmisek stated that these plan amendments are required due to legislative
changes passed that deal with small amount cashout limits. He stated that
there is no cost to the plan for these amendments and that this change should
not impact any current participants benefits in the plan.

Mark Hall, Alerus Financial, Trustee for the Defined Benefit Plan, commented
that the only participants that will ever be effected by this change would be
those who may leave employment with the city and have a balance below $5,000.
He continued that these amendments allow the City to force the participant to
take their funds out of the plan in either a lump sum payment or to have them
automatically rolled into an IRA account. Hall added that Alerus Financial
does have in place a proper program that could receive these funds, should this
situation ever arise. Lundmark commented that she had visited with RaeAnn
Burger, Compensation and Benefits Specialist, and had confirmed that typically
when shorter term employees that leave the city and were defined contribution
plan participants typically ask to take their dollars either in a lump sum or
roll it into their new employers plan. She continued that in the defined
benefit plan, we currently do not have any participants that would be affected
by the amendment, as their accrued benefits are all over the limits in the
amendment.

Motion by Storstad, Second by Flannery, to recommend approval of the Eighth
Amendment to the Defined Benefit Plan and the Fifth Amendment to the Defined
Contribution Plan. Aye: All. Motion Carried.


Matter of Request from 10 Employees to Rollover 457 Dollars to Purchase Past
Years of Service.

Schmisek stated that the committee had received background information on this
item at its March 2 meeting. He continued that the committee had previously
taken action on this item and sent it forward to Council, but the item was
pulled from the Council floor. The requesting employees are now bringing the
item back to the committee with a request to modify the earlier motion to allow
them to pay part of the cost of this buyback by rolling in some of the money
that they currently have in the 457 plan. He added that the request has been
reviewed by Dorsey & Whitney, our consulting law firm for pension matters, and
that federal rules governing our plan do allow this type of rollover with an
amendment to our plan. Schmisek stated that revised buyback numbers have been
calculated for the effected employees and the request is now up for committee
discussion. He added that the employees are also requesting that the committee
again consider allowing the buyback of individual years of service instead of
requiring the purchase of the full amount or nothing.

Roling commented that he would caution the employees to consider this decision
carefully, as some of the buyback numbers are significant and they should be
confident that the investment will be worth what they are able to obtain as
additional benefit. Roling explained further how these buybacks would be
treated in the future in regards to gains or losses in the plan and how any
plan changes that may occur before the employees would retire. He concluded
that he would highly recommend that the employees seek the advice of a
financial advisor prior to deciding to take part in this buyback, as they are
giving up very liquid retirement assets for a much more restrictive retirement
investment. Schmisek clarified for the committee that should the request be
approved, each effected employee could choose individually whether they wished
to participate or not. Flannery inquired whether the group could be brought
together and have a financial planner, or perhaps between Hall and Roling, they
could explain the things to consider before committing to participating in the
buyback. Both Hall and Roling concurred that they could put together basic
information and take questions from the employees.

Kreun inquired whether this was a one time irrevocable election and is there a
way to handle if the participant later wants to back out of the buyback once
they start paying in or leave employment before they have completed the full
payment into the plan. Roling stated that, yes, this was a one time chance for
them to choose to participate, and that the buyback numbers had been calculated
with a decision date of June 1. Schmisek stated that Terry-Lynne Lastovich of
Dorsey & Whitney had been consulted and stated that there are ways to handle a
participant that may leave employment prior to completing the payment. He
added that either a prorated benefit could be given or the amount of payments
made could be returned to the participant and that in the plan amendment that
would be drafted to implement this change, Lastovich would address this
circumstance.

Motion by Kreun, Second by Storstad, to recommend that Council authorize
changes in the plan document and city ordinance to accommodate the currently
qualified employees as of January 1, 2003, to allow for credit for years of
service in the Defined Benefit Plan back to January 1, 1995. And that Council
allow the designated employees to be accommodated by participation in a buy
back to January 1, 1995, either in full or by individual year, with a pay back
period of up to 10 years, at an interest cost of 8.25%, with a one time
irrevocable option to elect to participate in this buyback until June 1, 2005,
and further that the employees be allowed to fund such buyback through payroll
deduction, a roll-in of 457 dollars, or a combination of the two funding
sources, with the employee responsible for the entire cost and that there shall
be no cost to the City and further to authorize that an appropriate plan
amendment be drafted with authority granted to staff to execute such amendment
on behalf of the City. Aye: All. Motion Carries.



Other.

Mark Hall addressed the committee with an update on the RFP that is currently
out on the Defined Benefit Plan. He stated that he had distributed it to over
25 providers. He also informed the committee that the bid opening date will be
April 22, after which they will begin reviewing the proposals and can then
present to the committee either all proposals received, or a pared down number
consisting of those analyzed to be the highest rated proposals. It was
consensus of the Committee that they would prefer to received a scaled down
number for final consideration.

Motion by Kreun, Second by Storstad, to adjourn. Aye: All. Motion Carried.

Respectfully submitted,



John M. Schmisek, CPA
Director of Finance and Administrative Services