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CITY OF LINO LAKES, MINNESOTA <br />NOTES TO FINANCIAL STATEMENTS <br />December 31, 2019 <br /> <br /> <br /> <br /> <br />G. PENSION LIABILITY SENSITIVITY <br /> <br />The following presents the City’s net pension asset for the SVF plan, calculated using the discount rate <br />disclosed in the preceding paragraph, as well as what the City’s net pension asset would be if it were <br />calculated using a discount rate 1% lower or 1% higher than the current discount rate: <br /> <br />1% Decrease in 1% Increase in <br />Discount Rate (5.0%) Discount Rate (6.0%) Discount Rate (7.0%) <br />Net pension asset $296,964 $317,669 $337,322 <br />H. PLAN INVESTMENTS <br /> <br />1. Investment Policy <br /> <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 /> <br />All investments undertaken by the SBI are governed by the prudent person rule and other standards <br />codified in Minnesota Statutes, Chapter 11A and Chapter 353G. <br /> <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 /> <br />2. Asset Allocation <br /> <br />To match the long-term nature of the pension obligations, the SBI maintains a strategic asset <br />allocation for the SVF that includes allocations to domestic equity, international equity, bonds and <br />cash equivalents. The long-term target asset allocation and long-term expected real rate of return is <br />the following: <br /> <br />Target Long-Term Expected <br />Asset Class Allocation Real Rate of Return <br />Domestic Stocks 35% 5.10% <br />International Stocks 15% 5.30% <br />Bonds 45% 0.75% <br />Cash 5% 0.00% <br />100% <br /> <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 from a number of investment management and consulting <br />organizations. The asset class estimates and the target allocations were then combined to produce a <br />73