This update should get you asking, just what are the numbers for pensions in Minnesota? And why are there two sets of numbers (market and actuarial)? And why do they change, sometimes drastically, year to year? Answering those questions will help you grasp some of the problems with the way we manage pensions in Minnesota.

Market Value: The 2010 numbers released in January by the Legislative Commission on Pensions and Retirement (LCPR) show a significant reduction in the market value of the unfunded liability—about $4.6 billion. The market value is just the market value of assets minus the value of liabilities on a given date. (See the chart below for details.)
Plan Category
2009
2010
Statewide General Employee
$19,283,751,000
$15,578,308,000
Public Safety
$2,997,052,000
$2,067,765,000
Specialty Plans
$192,565,786
$177,361,187
First Class City Plans
$1,572,876,632
$1,620,603,026
$24,046,245,418
$19,444,037,213

Actuarial Value: The actuarial value of the unfunded liabilities decreased from $15.1 billion  to $12.4 billion. (See the chart below for details.)
Plan Category
2009
2010
Statewide General Employee
$12,355,679,000
$10,116,131,000
Public Safety
$1,439,969,000
$1,145,553,000
Specialty Plans
$160,135,786
$158,834,187
First Class City Plans
$1,184,794,264
$969,644,659
$15,140,578,050
$12,390,162,846

Why the big change from 2009 to 2010? The 2009 numbers reflected the severe market downturn in 2008. The increase in the market value of the state’s pension plan assets, and thus the improvement in the overall liability picture, reflects the market’s overall improved performance in 2009.   That is good news. The problem is that the market will tank again (it could be this year or 10 years from now)—and have normal ups and downs. That’s the nature of the beast. Pensions, which you’d think would be conservatively managed, are actually subject to an aggressive, high risk strategy because Minnesota has a very high assumed rate of return (8.5%) for its funds—the highest in the country. With high risk comes volatility.

Why Two Numbers? We are pleased to see the state publishing market valuations because they serve as a “reality check” and give a more accurate picture of pension funding status. So while pensions are dependent on many complex actuarial assumptions, it is good to see real time numbers. And since the actuarial assumptions tend to be complex and hidden from public view and scrutiny, they can have a high “fudge factor” designed to protect the lawmakers and other pension administrators from facing hard decisions. Creative actuarial assumptions can kick the can down the road so it is someone else’s problem.