Mendocino County Employees Retirement Association

What Causes Unfunded Pension Obligations?

There are many ways Unfunded Obligations can develop. In every case they are produced by actual results that vary negatively from the Actuary's projections. Some of the major causes of Unfunded Obligations are:

• Investment Returns: About 80% of the eventual pension payments are supposed to come from Pension Fund Investment Returns. Investment returns that are less than target increases UAAL.
• Higher Actual Pension Payments: If actual pension payments are higher than were projected, UAAL increases. For example, Mendocino County is only slightly below the County with the higest percentage of retirees with disabilities. Disability pay can greatly increase the amount a retiree receives. If the County's projected disability rate winds up to be less than actual, UAAL increases.
• County Contribution: If the County pays less than its supposed to each year, then UAAL increases. As a variant, if the County increases its payroll faster than it told the Actuary, then UAAL will increase.
• Retroactive Increase in Pensions: If the County increases pension benefits for some or all workers and applies the increase to previous years without providing additional funding the UAAL will increase.
• Diversion of Pension Funds: If MCERA transfers money out of the Pension Fund to make non-pension payments (such as Retiree Healthcare), this would increase the Unfunded Obligation.

These and many other elements contribute to the ultimately calculated UAAL; many elements may be better than expected, others worse. But these three are the main contributors.

The next page shows the yearly change in Unfunded Pension Obligations.