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October 1, 2002

A Message From Your Pension Board

To quote our fund's investment consultant: "Just like euphoria, pain becomes most intense at the end of the process. In 1999, nothing could go wrong - in 2002, nothing can go right. Like anything else in life, the truth is most likely found somewhere in the middle."

This information is merely intended to help clarify some issues and hopefully answer some questions for our membership. As you are all aware, the last 2 years have been challenging for the pension fund. After several years of exceptional investment returns, we have experienced several years of negative returns for the fund. This is indeed new territory for us all. We are always told that we will eventually "revert to the mean" or to the average market returns of approximately 10%. One just never knows exactly when this will happen. The extended deterioration in the market, which has gradually and painfully taken place, was certainly unforeseen. It would be nice to have a crystal ball, but no such luck. Oh - to have those boring 10% returns again!

The pension plan takes whatever cards are dealt to it and when the next biennial actuarial study is done, you then see where you are at that point in time. In the past we have had actuarial studies every two years, which is a standard in the industry. Based on the news, we make "adjustments" accordingly. Fortunately, those "adjustments" have usually been in the form of enhanced pension benefits in some form or fashion. After the biennial actuarial study of 12/31/99 (results given in June of 2000) our fund was found to be not only actuarially sound, but over-funded by $24 million, with a "0" year amortization period. With this good news, a benefits package was prepared for the upcoming legislature, which would convene in January of 2001. Based on the information then, even with this benefits package implemented, the fund would still be over-funded by $800,000, with a "0" year amortization period.

It is customary to look at benefit enhancements when over-funded. Otherwise it may be unfair to keep the same contribution rate into a plan that constantly remains over-funded. Most pension boards strive to continue giving the best benefits that are prudently possible and usually try to protect those benefits from losing ground to inflation through the form of cost-of-living adjustments. At some point a choice needs to be made when you are over-funded. The choice is a balance between pension contributions and benefits. Does one say I am satisfied with the benefits where they are, so let's reduce the overall pension contributions? Most pension funds opt for enhancing and protecting their benefits, rather than choose to reduce their overall contributions. The actuaries have based their projections and assumptions on current contribution rates, and do not want to see that number going downward for their long-term planning purposes and in case of any negative pension plan experience, which will happen sooner or later.

Likewise, if a future actuarial study reveals that the pension plan is inordinately under-funded there may be a choice to be made during lean times. The choice may again be a balance of pension contributions and benefits. Do you keep contributions where they are and implement some cost containment measures to reduce the liability to the fund? Cost containment measures could include anything from not giving COLA's, to reducing the retirement factor, to raising the retirement eligibility requirements, etc. It could be that a little of all the above would need to be done, in order to share the burden equally. After conducting a study, the actuary may make a combination of recommendations to maintain the actuarial and financial soundness of the plan. Or instead of that approach, does one want to protect the current benefits structure in place through the form of additional contributions? Again if it all came down to this, making additional contributions may be the way to maintain the health of the plan which involves the fewest variables. Perhaps less painful to many participants as well.

For the health of the pension plan, if additional pension contributions were perceived as the best solution, this should not be thought of as a "bailout". This opportunity could be viewed as a collaborative and coordinated long-term measure to maintain a good pension, which our firefighters and their beneficiaries can rely on now and in the future.

Chronology Of Events Since 12/31/99

The pension board would like to give an overview of the past 30 months.

December 31, 1999 - The biennial actuarial study for the pension fund begins.

June 2000 - Results of the actuarial valuation shows the pension fund is over-funded by an amount of $24 million, with an amortization period of "0" years.

September 2000 - After various studies a benefits package is proposed for the legislature which, if passed and implemented, would keep the fund over-funded by an amount of $800,000 with an amortization period of "0" years. This enhanced benefits package is the current structure in place, which includes the following key enhancements:

  • Increase the annual permanent COLA from % to 1%.
  • Increase the retirement multiplier from 3.1% to 3.3% (This represents a 6.45% increase in the amount of the multiplier).
  • A corresponding ad hoc increase of 6.45% in all current retirees' benefits beginning with the September 2001 benefit payments.
  • Provide a 75% survivor benefit to all unmarried retirees.
  • Extend the DROP from a maximum of 5 years to 7 years.
January 2001 - SB 790 is proposed in the state legislature with all changes to be effective September 1, 2001.

June 2001 - SB 790 is passed and signed by the Governor, with all changes to be effective September 1, 2001. SB 790 now has legislative and actuarial approval.

September 1, 2001 - The new benefit enhancements go into effect.

December 31, 2001 - The next biennial actuarial study for the pension fund begins.

June 2002 - Results of the actuarial valuation shows the fund is under-funded by approximately $11 million, with an amortization period of 26.5 years, remaining actuarially and financially sound as of that measurement date.

December 31, 2003 - The next regularly scheduled biennial actuarial study will begin.

There has been some discussion of having a study at the end of December 2002 to get a current reading of the fund's liability, but that is not mandatory nor has it been decided yet. The entire market situation will continue to be monitored with our fund's investment consultants as we go forward. The pension board appreciates your cooperation through the good times as well as these trying times. Please contact your pension board or your pension office if you have any questions or concerns.

Thanks On Behalf Of Your Pension Board.