Midwest neighbors Wisconsin and Illinois are at opposite ends of the public pension funding spectrum, with Wisconsin 99.8% funded and Illinois, 43.4%, according to an inaugural report from Morningstar.
Twenty-one states had a funding ratio of less than 70%, according to the most recent data available to Morningstar, typically as of June 30, 2011. Seven states had a funding ratio of more than 90%.
Morningstar focused on two metrics — funding ratio and unfunded actuarial accrued liability per capita — in its report, “The State of State Pension Plans: A Deep Dive into Shortfalls and Surpluses.”
“I was surprised that there were so many states below the 70% threshold,” said Rachel Barkley, municipal credit analyst at Morningstar. “Overall, we are seeing states are seeing a reduction in their funded ratio,” she added, citing investment losses from the financial crisis and states using smoothing periods.
Morningstar also elected to focus on the UAAL per capita to represent the total cost of pension liabilities to taxpayers. Since many of the plans are cost-sharing multiemployer plans, the total liability burden is not all on the state governments.
“One way or another, it's generally a taxpayer burden,” Ms. Barkley said in a telephone interview.
Wisconsin also had the lowest unfunded liabilities per capita at just $23, compared with Illinois' second-worst $6,505 and Alaska's leading $10,235. However, Alaska has a 59.2% funding ratio and derives much of its revenue from oil and gas, making it a potentially less precarious situation than states with traditional revenue streams, Ms. Barkley said.
Overall, 14 states have an UAAL less than $1,500 per capita while 20 states are above $3,000 per capita.
Morningstar also looked at plan structure and management of the pension systems. Ms. Barkley said Illinois rated “poor” in funded ratio, UAAL per capita and management because the state does not contribute the full actuarially required amount and has approved benefit increases without meaningful pension reform.
Ms. Barkley added that new upcoming accounting rules, including placing net pension liabilities on balance sheets and eliminating smoothing periods, will “really change the game.”
Among other states:
- North Carolina was 95.3% funded with $311 UAAL per capita;
- New York, 90.5% funded, $814 UAAL per capita;
- Tennessee, 92.1% funded, $415 UAAL per capita;
- Washington state, 98.1% funded, $160 UAAL per capita;
- Kentucky, 50.5% funded, $4,488 UAAL per capita;
- Hawaii, 59.4% funded, $6,114 UAAL per capita; and
- Connecticut, 53.4% funded, $5,885 UAAL per capita.
Morningstar plans on updating the report on an annual basis.
