Mendocino County Employees Retirement Association

What are Unfunded Pension Obligations?

If a Pension Fund doesn't have enough money today to fully fund all the payments it needs to make in the future, it has an "Unfunded Pension Obligation". The future payments are primarily pensions that have already been earned by employees in the past.

There are two ways to calculate this "deficit" (we use values for Mendocino's Pension Fund as of 6/30/09 that were estimated by its Actuary in July - final numbers are not yet available as of 8/31/09):

The Market Value of Assets is what the Fund is really worth. It’s based on the real value of its investments. It’s the actual dollars the Fund has to invest and pay pensions. But Market Value can change rapidly because of the stock market’s volatility. County payments to the Fund would careen up and down making it hard to plan year to year.

That’s where the Actuarial Value of Assets comes in. A formula slows down changes in value caused by the stock market’s volatility. This prevents extreme year to year changes in the County’s Unfunded Obligation payments.

Why do Actuaries use two values for Assets? Is there a danger in having two values? Find out by clicking -

Supplemental Information: Lies, DAMN LIES, and Actuarial Statistics (pdf file - 371KB).

What Is Reported and What Isn't

Since the mid-'90's all local and state governments have had to provide "Required Supplementary Information" about their pension obligations as attachments to their audited financial statements. Among this information are:

• Actuarial Value of Assets: A calculated value of Retirement Fund Assets.
• Actuarially Accrued Liability: The current value of the retiree benefit obligation that has already been earned by employees and retirees.
• Unfunded Actuarially Accrued Liability ( or - Unfunded Pension/Healthcare Obligation): If the current value of future benefit payments is greater than the Fund’s Assets, there is a deficit - or “Unfunded Liability”. This is part of the County’s Long-Term Debt. It is money that should be in the fund, but isn’t.

Note the Market Value is not reported - only the Actuarial Value. But they are not the same. Usually, when the stock market is doing its "normal" up and down, these two values are not hugely different.

But when the stock market changes radically these two values can be significantly different. If the stock market suffers a huge loss, it can be very dangerous to act as though the Actuarial Value is the Real Value. It isn't.