Resolution amending Minnetonka Firefighters Relief Association lump sum pension benefit and approving a fire state aid allocation agreement 

Darin Nelson, Finance Director

Kevin Fox, Fire Chief

Moranda Dammann, Assistant City Manager

Erik Nilsson, City Attorney

Mike Funk, City Manager

The Minnetonka Firefighters Relief Association (MFRA) is requesting an increase in the lump sum service pension payment, from $15,000 to $18,000 per year of service. All service pensions are subject to a maximum of 30 years of service. The pension fund can financially support this increase. The statutory maximum lump sum payment is currently $20,000 per year of service. 
 
Actuarial estimates indicate that the pension fund will be 132 percent funded at the $18,000 lump-sum multiplier, with no required city contribution. Under state statutes, 100 percent of the fire state aid received by the city needs to be remitted to the MFRA for investment in its pension, unless an agreement is made between the city and the relief association. In conjunction with the monthly pension benefit increase, the MFRA has agreed to extend the original state aid sharing agreement through December 31, 2027, with the fire state aid split approximately 50/50 between the MFRA and the city. The city's 2027 estimated share of the fire state aid is $363,500, which directly helps reduce the property tax levy. 

Motion to adopt the resolution amending Minnetonka Firefighters Relief Association lump sum pension benefit and fire state aid agreement

The requested pension benefit increase is not expected to have a budget impact on the General Fund. There is always the possibility of a major market correction that could require future statutory city contributions. However, the funding percentage is sufficient to guard against modest market corrections. The sharing of the 2027 fire state-aid is estimated at $363,500, which aids in reducing the 2027 levy. 

The MFRA was founded in 1972 to pay retirement, disability and survivor benefits to Minnetonka paid-on-call (POC) firefighters. Under law, all benefits must be paid from the relief association’s special fund, which consists primarily of State of Minnesota fire aid payments and investment earnings. The receipt of state fire aid is contingent upon compliance with financial requirements that are set by state law. Those requirements include a periodic actuarial valuation of the special fund and a city obligation to contribute to underfunded relief association pensions. 
 
An actuarial valuation determines whether the special fund’s assets are sufficient to cover the expected pension payouts, based on the ages and years of service of existing members. If the actuarial valuation indicates that the funds are sufficient, the special fund is deemed either fully funded or overfunded. If the valuation indicates insufficient funds to pay expected pensions, the special fund is deemed underfunded.
 
When a relief association special fund is underfunded, state law requires the local municipality to make up the difference through municipal contributions to the special fund. This typically occurs when market changes negatively affect the special fund investments. For example, Minnetonka had to contribute $797,000 of General Fund dollars to the relief association over five years beginning in 2009. A city is only liable, however, for pension amounts paid pursuant to association by-laws that the city council has ratified. The relief association has authority to increase benefit levels without city council ratification, but the city council is not required to fund any increases it has not approved.
 
On Aug. 18, 2026, the membership of the MFRA adopted an amendment to its by-laws to increase the retirement benefits paid by its pension fund, a required action before formally presenting the issue to the city council. The relief association is requesting formal approval of the adopted by-law amendment by the city council. 
 
The MFRA has periodically adopted increases in pension benefit levels since its establishment. Benefit levels were last increased in 2024, 2023, 2021, 2019 and 2008. The current lump sum payment is $15,000 per year of service. The MFRA’s funding percentage on January 1, 2026, for the current lump-sum payment amount is 140 percent. The MFRA is requesting a lump sum benefit increase to $18,000 per year of service. At this requested level, the MFRA pension would be approximately 132 percent funded as of January 1, 2026, which would still allow for a buffer if financial markets experience a substantial downturn. In 2024, when the last increase in pension benefit levels was approved, the pension was about 119 percent funded.  
 
In 2024, the $15,000 lump-sum annual multiplier was also the maximum lump sum benefit allowed under state statute. The MFRA and the city staff had been working on a plan over the previous four years to steadily increase the lump-sum pension benefit to the state maximum while ensuring the pension remains financially strong and minimizing the city's current and future liabilities. In 2025, the legislature increased the maximum lump-sum annual multiplier to $20,000. As with the prior plan to steadily increase the annual pension multiplier while minimizing liability, MFRA and the city are continuing that course by taking incremental steps toward the state-allowed maximum. Assuming the markets remain steady, the plan would be for the MFRA to request approval of an additional increase a year from now. 
 
Part of the plan to increase the annual multiplier towards the state maximum also includes sharing future state fire aid payments. State statute requires that 100 percent of the fire state aid received by the city be remitted to the MFRA for investment in its pension, unless an agreement is made between the city and the relief association. The MFRA and the city entered into an original sharing agreement two years ago to share the 2025 and 2026 fire state aid payments, due in part to the MFRA being at the statutory maximum pension benefit and the pension fund being over 100 percent funded with no required city contribution. The MFRA agreed to allocate state fire aid on a 60/40 basis, with the city receiving 60 percent. The 2025 state fire aid distribution totaled $599,954, with the city retaining $359,972. The MFRA also receives supplemental fire aid, totaling $80,251 in 2025. This supplemental fire aid cannot be allocated to the city and must remain fully with the MFRA. This combination of allocations brings the total fire aid received to about a 50/50 split between the two parties.
 
This amendment extends the original agreement for one year through December 31, 2027. As mentioned earlier, and assuming the financial markets remain stable, the MFRA and the city are likely to consider an additional pension benefit increase one year from now, which would likely include another amendment to share future fire state aid payments. Future agreements would again need to be agreed upon by both parties.