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CITY OF LINO LAKES, MINNESOTA <br />NOTES TO FINANCIAL STATEMENTS <br />December 31, 2016 <br />H. PLAN INVESTMENTS <br />1. Investment Policy <br />The Minnesota State Board of Investment (SBI) is established by Article XI of the Minnesota <br />Constitution to invest all state funds. Its membership as specified in the Constitution is comprised <br />of the Governor (who is designated as chair of the Board), State Auditor, Secretary of State and <br />State Attorney General. <br />All investments undertaken by the SBI are governed by the prudent person rule and other standards <br />codified in Minnesota Statutes, Chapter I IA and Chapter 356A. <br />Within the requirements defined by state law, the SBI, with assistance of the SBI staff and the <br />Investment Advisory Council, establishes investment policies for all funds under its control. These <br />investment policies are tailored to the particular needs of each fund and specify investment <br />objectives, risk tolerance, asset allocation, investment management structure and specific <br />performance standards. Studies guide the on-going management of the funds and are updated <br />periodically. <br />2. Asset Allocation <br />To match the long-term nature of the pension obligations, the SBI maintains a strategic asset <br />allocation for the Statewide Volunteer Firefighter Retirement Plan (VOLP) that includes <br />allocations to domestic equity, international equity, bonds and cash equivalents. The long-term <br />target asset allocation and long-term expected real rate of return is the following: <br />The 6% long-term expected rate of return on pension plan investments was determined using a <br />building-block method. Best estimates for expected future real rates of return (expected returns, <br />net of inflation) were developed for each asset class using both long-term historical returns and <br />long-term capital market expectations. The asset class estimates and the target allocations were <br />then combined to produce a geometric, long-term expected real rate of return for the portfolio. <br />Inflation expectations were applied to derive the nominal rate of return for the portfolio. <br />3. Description of significant investment policy changes during the year <br />The SBI made no significant changes to their investment policy during fiscal year 2016 for the <br />Statewide Volunteer Firefighter Retirement Plan. <br />74 <br />Target <br />Long -Term Expected <br />Asset Class <br />Allocation <br />Real Rate of Return <br />Domestic Stocks <br />35% <br />5.50% <br />International Stocks <br />15% <br />6.00% <br />Bonds <br />45% <br />1.45% <br />Cash <br />5% <br />0.50% <br />100% <br />The 6% long-term expected rate of return on pension plan investments was determined using a <br />building-block method. Best estimates for expected future real rates of return (expected returns, <br />net of inflation) were developed for each asset class using both long-term historical returns and <br />long-term capital market expectations. The asset class estimates and the target allocations were <br />then combined to produce a geometric, long-term expected real rate of return for the portfolio. <br />Inflation expectations were applied to derive the nominal rate of return for the portfolio. <br />3. Description of significant investment policy changes during the year <br />The SBI made no significant changes to their investment policy during fiscal year 2016 for the <br />Statewide Volunteer Firefighter Retirement Plan. <br />74 <br />