November 26, 2012 (PLANSPONSOR.com) – Morningstar’s analysis of U.S. pension plans found the strongest- and weakest-funded systems.
“The State of State Pension Plans: A Deep Dive into Shortfalls and Surpluses,” which analyzed current data for pension plans administered by all 50 states, revealed that Wisconsin had the strongest-funded pension plan system while Illinois had the weakest.
Using both funded ratio and unfunded actuarial accrued liability (UAAL) per capita, Morningstar found Wisconsin’s funded ratio to be 99.8% with the liability per resident at $23, and Illinois’ funded ratio to be 43.4% with a liability of $6,505 per resident.
Twenty-one states fall below Morningstar’s fiscally sound threshold of a 70% funded ratio, while seven states have an aggregate funded ratio of 90% or more. Fourteen states have a UAAL less than $1,500 per capita, Morningstar’s threshold for “good” unfunded liability levels. Twenty states have a UAAL more than $3,000 per capita; Alaska has the highest UAAL per capita, currently more than $10,000.
“Our analysis of the fiscal health of state pension plan systems across the country found that creditworthiness varies greatly and is heavily dependent on the funded ratio and the unfunded liability per capita—we look at both key metrics to evaluate each state's system. We find the UAAL metric useful because it represents the burden on residents, though it isn't widely used in the industry as an evaluation tool,” said Rachel Barkley, municipal credit analyst for Morningstar. “Not only do state pension plan systems represent the state's financial obligations, but they are often structured as umbrella plans that also cover employees in the state's local government bodies. Because pension liabilities represent significant long-term obligations for government entities, pensions are an important element in determining a municipal entity's credit quality.”
An excerpt of the analysis is available at http://global.morningstar.com/statepensions. For a video and article highlighting the research findings, click here.