By Cyril Tuohy
Two contiguous states could hardly be more different when it comes to the funding level of their respective state pension plans: Wisconsin has the best-funded pension plan in the nation, while Illinois has the worst.
Only Puerto Rico, a commonwealth, lags behind Illinois, according to an annual survey of state pensions released by Morningstar.
“We’ve seen the funded levels of state pension plans continue to decline during the last year, albeit modestly, and the bankruptcy filings of San Bernardino, Calif., and Detroit, Mich., may have significant effects on the national level,” Rachel Barkley, municipal credit analyst for Morningstar, said in a news release.
The good news is that long-term investment returns are “generally in line with assumptions used by most pension plans,” she said. Pension reform in many states has also helped, and new standards approved by the Governmental Accounting Standards Board “could spark some significant changes,” she also said.
Morningstar evaluates plans using two key metrics: the funded ratio, or the ability of a pension plan to meet its obligations, and the unfunded actuarial accrued liability (UAAL) per capita, which is the amount each person in the state would need to pay to fully fund the unfunded liability.
Wisconsin has the best-funded pension system with a funded ratio of 99.9 percent, an increase of 0.1 percent from last year. In addition, the per-capita liability of $18 for every Wisconsin resident fell $3 from last year, according to the Morningstar report.
“While some states are adequately managing their aggregate pension liabilities, the majority of state pension systems are coming under duress,” Barkley wrote, in an overview of her 36-page report.
The Illinois state pension system has a funded ratio of only 40.4 percent, falling 3 percent from last year and raising the per-capita liability by $900 to $7,421 for every resident, the report also said.
The shortfalls in Illinois are due to the state borrowing from the plans, inadequate funding and low investment returns.
Puerto Rico’s funded ratio of 11.2 percent translates into a per-capita liability of more than $8,900, the report said.
A total of 26 states and Puerto Rico fall below Morningstar’s “fiscally sound” threshold of a 70 percent funded ratio. In the aggregate, state plans are 72.6 percent funded with a UAAL of $2,600, the report said.
Six states have funded levels of more than 90 percent, and seven states have UAAL’s of less than $100 per capita, the report also said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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