Print VersionStay Informed
PENSION AND INSURANCE COMMITTEE MINUTES
Thursday, May 15, 2003
Council Chambers

The meeting was called to order at 3:00 p.m.

Committee Members Present: Richard Duquette (Mayor’s Designee), Al Grasser,
Vince Liddy
Committee Members Absent: Eliot Glassheim, Gerald Hamerlik
Staff Members: Charles Bunce, John Schmisek

Duquette 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 the September 8, 2002 meeting.

Motion to approve the mintues by Liddy, second by Grasser. Aye: All. Motion
carried.

Matter of Defined Contribution Plan Manager Contract.

Grasser stated that the committee members received a final report from the
subcommittee in their packets. He said the subcommittee had received 10
proposals and selected four firms to interview. Following the interviews, the
subcommittee discussed and then ranked the firms. Final ranking was : 1)
Alerus Financial; 2) Morgan Stanley; 3) Nationwide Retirement Solutions; 4) The
Hartford.

Motion by Grasser, second by Liddy to recommend that City Council appoint
Alerus Financial as Plan Manager and Trustee of the Defined Contribution Plan
for a term of three years, renewable annually thereafter as agreeable to both
parties. Aye: All. Motion Carried.

Matter of Seventh Amendment to the Defined Benefit Plan.

Terry-Lynne Lastovich of Dorsey & Whitney was present to discuss the amendment
with the committee. She stated that in 2002 the required EGGTRA legislative
mandated changes had been made in the plan. This amendment contains
recommended changes due to legislative acts and case law. She briefly reviewed
with the committee the changes in each section of the plan document.

Changes in Section 1 of the document were made for moving expense reimbursement
exclusions and changes to the definition of recognized employment to bring the
plan document in line with wording used in the City Code and IRS code changes.
The word classified is being used to more clearly define a regular, full-time
employee.

Changes in Section 5 are being recommended based on recent case law to more
clearly define issues related to beneficiaries of a participant in the plan.

Changes in Section 8 are to include the “Firestone” language to the plan
document. This change is being recommended as a result of case law and states
that the plan administrator has the discretion of deciding who is entitled to
benefits under the plan. Courts will give deference to the plan administrator
in disputes over benefits, unless the plan administrator can be shown to be
using unsound interpretations. The committee asked who is considered to be the
plan administrator in our plan. Lastovich stated that the City is the
administrator. The committee inquired whether there was any additional
fiduciary responsibility that comes with this language. Lastovich stated that
there is not any greater fiduciary risk, the language just gives more authority
to the City to interpret our own document.

The remaining changes in Section 8 are to move any items not associated with
claims into the next section, Section 9 Plan Administration. The intent is to
clean up the document so that all claim related items are in one section.

Changes in Section 9 deal list the moved items from Section 8 that now fall
into this plan administration section. In addition, there is a recommendation
to add language dealing with the “mailbox rule”. This clarifies that in terms
of the plan “received” means actually received and in the participants plan
files. There is also a recommendation to the City that language be added that
specifies whether powers of attorney are accepted, and under what rules, they
are accepted, or that the plan does not accept any powers of attorney.
Lastovich stated that we do not fall under the umbrella of ERISA, and as such
we need to have this in the plan to document to show how we handle these. She
further stated that a power of attorney is not as much a risk in this plan as
in the DC Plan, as all a POA can do in the DB Plan is commence the benefit for
the participant. This section also deals with guardians and conservators and
the recommendation is to add language that states that the plan recognizes
their court appointed power to act on behalf of the participant.

Matter of Fourth Amendment to the Defined Contribution Plan.

Lastovich stated that most of this amendment deals with legislative required
changes and additions or language changes that are being recommended due to
recent case law, with a lot of the changes being the same as in the DB Plan.

Section 1 changes include the clarification of the definition of compensation
to refer to the IRS code section 415 definition and the same changes for moving
expenses as in the DB Plan. It also includes a change in recognized employment
to reflect recent IRS guidance on worker classification. It also includes the
addition of language to allow persons that would otherwise qualify for the DC
Plan to be excluded from the plan if they are covered under an employment
contract.

Section 3 changes recommends language allowed under the latest EGGTRA that
permits the plan to accept rollovers from a broader array of retirement plans
than previously allowed.

Section 11 includes the recommendation to include the “Firestone” language in
this plan as explained for the DB Plan. As in the DB Plan, the remaining
changes in this section are to remove any items not dealing with claims and
place them in the next section (Section 12 Plan Administration). This is
recommended to clean up the document and better group related sections.

Changes in Section 12 include the addition of the materials that had previously
been in Section 11, as explained above. Recommended changes also include the
same “receipt of document”, power of attorney, and guardian and conservators
language as in the DB Plan. The Power of Attorney does have more of an impact
in this plan than the DB Plan, as the POA could not only just commence
benefits, but can also determine how the benefit will be distributed (i.e. lump
sum, monthly, etc.) There have been cases where a participant may have two
valid powers of attorney and the individuals have opposing views on how or if
the benefit should be. This language protects the City from a conflict in this
situation.

Grasser inquired how ICMA fits into all of this, as the Committee has never
gotten a report of any kind on the ICMA plan. Schmisek stated that plan is
separate from both the DB and DC Plans. He stated that the City has no control
over investments in the ICMA plan as it is all governed by the ICMA
organization. The plan is a 457 plan and was started to allow those employees
that were short term employees the benefit of a pension that was portable.
RaeAnn Burger in Human Resources has a copy of the contract. Grasser requested
from Human Resources a list of the employees in this plan for the next
meeting.

Other Items.

Pete Haga, Assistant to the Mayor, presented to the committee a letter from
Mayor Brown asking for consideration of a situation affecting 10 employees
covered under the Defined Benefit Plan.

Dawn Wilkie of Human Resources reviewed for the committee the history of the
situation. The affected employees began work for the City between 1985 and
1995, as what was then termed part-time, temporary employees. At that time
they received no benefits from the City. On January 1, 1995, the City Council
granted benefits to part-time, temporary employees, with the exclusion of
pension benefits until such time as they took classified positions with the
City. By virtue of their hire dates, they would all be covered by the Defined
Benefit Plan at the time of classification. As they had one hour of service
prior to January 1, 1996, they can not be participants in the Defined
Contribution Plan. The employees have now taken classified positions with the
City, and as of that date become participants in the Defined Benefit Plan. The
years of service for them begin as of the date they became classified, and
gives no credit to them for the prior years of part-time service. The
employees are requesting credit for years of service back to their original
hire date, or as a compromise, at least credit back to January 1, 1995 when
other benefits were granted to part-time temporary employees.

Wilkie further stated that the group feels that the plan document could be
interpreted to include these employees. The document reads that the plan
covers “all regular, full-time, employment …..”. The group feels that there
employment during this time, while not classified, could be interpreted to fit
this description. Schmisek stated that since the time the plan was designed
the interpretation of “regular, full-time employment” has always been
interpreted as “classified” and further that the policy of the Council at the
time the Defined Benefit Plan was written was clear on the employees that were
covered. He further stated that the City ordinance that was passed in 1995
granting other benefits to part-time temporary employees, expressly stated that
these positions were not eligible for a pension benefit.

Bunce inquired whether they were asking that the plan take precedence over City
Ordinance. Wilkie responded that they were.

Wilkie stated that the Mayor’s letter is asking for a consideration of the
matter by the committee and that an audit to determine that these are the only
affected employees and a calculation of the cost of granting his request.

Duquette inquired what cost computation the group was looking for, employee
only or both employer and employee. Wilkie stated that the group would like
both employer and employee to be paid in by the City. She stated some
estimated cost numbers that they had come up with. Schmisek stated that the
actual cost would need to be determined by the City’s actuary, Deloitte and
Touche, and that in all probability, it will be substantially more than the
amount stated by Ms. Wilkie.

Wilkie stated that the group is looking for the City to do what’s right for the
employees no matter what the cost. She stated that the employees have an issue
with what is the correct interpretation of their eligibility date and that if
it is decided to be the actual hire date, and not the classification date, that
the City make the employees whole.

Wilkie stated that there is an issue for some of the employees also in regards
to some contributions that were made by them into the DC Plan. She stated that
in 2001 non-classified employees meeting the hour requirement were determined
to be eligible for the Defined Contribution Plan and as such were started in
the plan. The City made a corrective contribution into the plan for any
employees that should have begun their participation prior to 2001. In 2001,
some of the employees that were started in the DC Plan were actually not
eligible, as they started work for the City prior to January 1, 1996. When the
error was discovered, their contributions to the DC Plan were ceased, but the
money has remained in the plan.

Schmisek stated that the attorneys from Dorsey & Whitney have provided us today
correspondence on determining the appropriate amount of that contribution to
the employees affected, however the amount to be returned for some may be
dependent on the outcome of this matter.

Bunce inquired if there is a concern for the City in other now terminated
employees may have been in a similar situation that should be considered.
Lastovich stated that any change in interpretation can have other effects.
She stated that is the difference with the DC Plan as there is a vesting
schedule for that plan.

Ed Grossbauer, Fire Department asked what the employees were looking for.
Wilkie stated that the group feels that they are entitled to a contribution by
the City that would give them years of service at least back to January 1,
1995, but preferably back to date of hire. She stated that the group feels
that this issue is the same as the corrective contribution that was made in the
DC Plan. Grossbauer stated that the issues are separate. He stated that his
understanding of the DC Plan matter was that the City had erred in
administering the plan document as it was written, and as such, was required to
make the payment into the plan on behalf of the affected participants.

Grasser inquired what retirement age the affected participants had elected upon
their entrance to the DB Plan. Wilkie stated that they had all elected age 55
retirement with a 7.4% contribution.

Duquette inquired about the meaning behind a common law employee term used in
the letter from the Mayor. Wilkie stated that the plan document references a
common law employee. The group feels that there employment fits that legal
definition. She further stated that this would not have been an issue if there
was a way these employees could have continued in the DC Plan. Lastovich
explained for the committee that the participants can not participate in the DC
Plan as they had employment with the City prior to January 1, 1996. She
further stated that the term common law employee was not an issue.

Wilkie stated that the group is looking for retroactive recognition of their
employment with the City. Wilkie further stated that the group believes that a
similar situation exists with the contracted department heads that have been
allowed to continue participation in the plan. She stated that there is a part
of this amendment that allows for them to continue in recognized employment
despite not being a classified employee.

Schmisek stated that there is a clarification in the amendment to continue to
allow the department heads who were participants in the plan to continue in the
plan. He stated that the intent of Council when approving those employment
contracts was to allow those individuals to be able to continue in the plan.
This is allowing a person who has already qualified for the plan to continue in
recognized employment, not bringing in additional people who have never been a
participant.

Bunce stated that the committee could also consider the intent of the usage of
temporary employees and whether this was for the convenience of the City and
also look at the intent of the employees and whether it was for their
convenience or if they were in the position with the intent of becoming
classified.

Grasser asked if when the other benefits were started how they calculated the
eligibility. Schmisek stated that they would look at how many hours the
employee worked in the prior calendar year and then the percentage of hours
worked determined the benefit level for the upcoming year. He reiterated that
this excluded pension.

Schmisek stated that he will contact the actuary to compute the cost as
requested, with a breakdown between total cost, employer share and employee
share. He also would like to request a legal interpretation of any other
potential liability for the City should it choose to approve the request.
Wilkie asked that a calculation be made two ways – one back to the date of hire
for each person, and a second back to January 1, 1995 for those employees that
began work prior to that date, with the appropriate breakdowns between employer
and employee share for each calculation.

Grasser inquired whether this could affect any others who had initially elected
not to participate in the plan at eligibility date and now may want to come
in. Schmisek stated that any time a retroactive change is made you open the
door for more potential questions.

Liddy inquired whether all of these items had come through the committee
before. Schmisek stated that the committee determines the plan document
content.

Lastovich stated that the plan document language in regard to the definition of
recognized employment is different between the plans. This was noted for the
City at the time the plans were being drafted and the City approved the
language the way it is written. Under the DC Plan, all employees are covered,
not just classified employees, whereas in the Defined Benefit Plan the language
is restrictive to full-time regular employees which is proposed to be modified
in the amendment the committee is reviewing so that the wording is the same as
in the City Code. She stated that the errors that were referred to earlier
were in that DB Plan language was being used to administer the DC Plan, rather
than using the language in the plan document. This led to the requirement for
a corrective contribution.

Grasser stated that in some ways it may seem like its being fair versus being
legal under our plan. He asked whether the current contract language will
correct the situation. Lastovich stated that it does.

Motion by Duquette, Second by Grasser, to authorize an actuarial analysis of
the cost of giving the employees credit back to January 1, 1995 or back to
their start date; with the cost to be broken down between employer and employee
share. Aye:All. Motion carried.

Wilkie thanked the committee for their time and consideration of this matter.

1) Bunce stated that his staff had prepared a list of items that they would
like reviewed to make sure all areas of the plans are in compliance with our
current City Code. Wilkie stated that after discussion she would like the
opportunity to revise the list, as some areas had been clarified at today’s
meeting and for those areas not covered, she would like to be able to write
more of a narrative to describe the question than was on the current sheet.
Schmisek stated that if the list were prepared and submitted to the Finance
Department, they would forward it to Dorsey & Whitney for review.

2) Pete O’Neil, Fire Chief, addressed the committee. He stated that he has
been an employee of the City for 26 years and in 1999 was offered a chance to
be promoted from Assistant Fire Chief to Fire Chief. He stated that he was the
first department head to sign a contract that was a participant in the Defined
Benefit Plan. He stated that his contract stipulates that his participation in
the DB Plan continues and he agreed to that contract with that as a condition.
He encouraged the committee to make any necessary changes to the document that
would allow the contracts that are in place to remain the same. Lastovich
replied that the appropriate language had already been included in the
amendment.

3) Ed Grossbauer, Fire Department, addressed the committee on behalf of
employees in his department that are participants in the Defined Contribution
Plan. He stated that an informal survey of the participants was conducted and
that all of them are in favor of an increase in the contribution percentage
allowed for the plan. He stated that this has been brought up at the committee
level several times, but no action has been taken. He stated that at the
inception of this plan, the committee had stated that the contribution level
could be increased at a later date. He provided the committee with some
information from the 2001 Comprehensive Annual Financial Report on percentage
of contribution that is put into the Defined Benefit Plan, which averages 8.27%
for the last five years. He stated that about a year and a half ago he had
gotten some cost information for an increase to a 7% level and that was an
additional $55,000 annually at that time.

Schmisek stated that he believed that when the plan began the committee had
initially compared to an age 65 retirement in the Defined Benefit Plan.
Lastovich reminded the committee that they should use caution in increasing the
percentage, as they moved to a DC Plan in an effort to control costs. She
stated that one option the City could look at is setting one contribution rate
for Public Safety and a different one for other departments. Grasser inquired
whether the City could set say three contribution rates and then employees
would elect which one they wanted. She stated that the employees can not vary
in which group they are in, it would have to be explicitly stated who belongs
in each range.

Duquette asked that this item be brought back to Committee on the next agenda.
Schmisek stated that they would do a calculation of what a 1% increase would
cost and this would give the Committee the ability to look at different
increases and its effect.

Schmisek also cautioned that the City is currently in the middle of a budget
year and that any change could have budget ramifications that were not able to
be covered. He stated that he would like to see this also considered as a
part of the budget process or if approved with an effective date to coincide
with the budget.

Grasser requested that a full official survey be conducted by the employee reps
and that a report of the results of such survey be provided to the committee
with its information packet for the next meeting.

Shari Hensrud-Ellingson, Alerus Financial, stated that she would recommend an
analysis before setting the rate due to the risk bearance of the City.
Grossbauer stated that in this plan the employees have all the risk, as the
City amount is fixed. Lastovich reiterated that the City’s intent in moving to
a DC Plan was to control its costs in the future. She stated that Mr.
Grossbauer was correct in his statement that participants bear the risk in the
DC Plan, however the City should keep in mind its overall pension cost risk for
both plans when making any financial decision.

Meeting adjourned 5:15 p.m.

Respectfully submitted,



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


JMS:SL