Puerto Rico can only cover 11.2 pct of pension costs-Morningstar

WASHINGTON, Sept 16 Mon Sep 16, 2013 12:55pm EDT

WASHINGTON, Sept 16 (Reuters) - Puerto Rico can cover only 11.2 percent of its public pension costs, which is even less than the notoriously underfunded Illinois retirement system, an independent investment research group reported on Monday.

Morningstar said that looking only at U.S. states, however, Illinois is in the worst condition. The state has only enough assets to cover 40.4 percent of its liabilities, or 3 percent less than last year, it said.

Wisconsin continues to have the best-funded public pension among U.S. states and territories, Morningstar found, as it is able to cover 99.9 percent of its retirement system's estimated costs.

Puerto Rico, a U.S. commonwealth since 1952, is in dangerous waters for retirement funding as its economy and fiscal conditions deteriorate. Its pension liability is now put at $8,900 per person, and the island's three public pension plans are projected to deplete their respective assets in the coming years, Morningstar said.

Puerto Rico's 3.7 million people have endured a shrinking economy since the mid-2000s that may again be tumbling back into recession, partly from a pensions overhaul that is kicking in. It passed reforms earlier this year to try to bring down its $37.3 billion of unfunded pension liabilities, but the territory's $35 billion of pension debt will remain for years.

Altogether, 26 states and Puerto Rico fall below the 70 percent funding level which Morningstar considers "fiscally sound." On the flip side, 12 states have funded ratios of 80 percent or more.

In aggregate, the funded ratio for all states and Puerto Rico was 72.4 percent in 2012, compared to 74.5 percent in 2011, according to Morningstar data.

For Illinois, the pension liability is equivalent to $7,421 per person, up $900 from last year.

A bipartisan panel of Illinois legislators has been meeting since June to find a way to address the state's $100 billion unfunded pension liability. Continued inaction on pension reform has pushed Illinois' credit ratings to the lowest levels among U.S. states. It also led Illinois Governor Pat Quinn to suspend lawmakers' pay to spur action on pensions.

Moody's Investors Service recently determined that the state's pension bill is equal to 241 percent of its revenues.

Earlier this year, Illinois had to settle with federal securities regulators over misleading municipal bond investors about the underfunding of its pension system.

The financial crisis five years ago devastated public pensions' investments - which provide 60 percent of their revenues. At the same time, states that had short-changed their pensions for years pulled back even further as their own revenues buckled during the 2007-09 recession.

As retirement systems racked up massive shortfalls, statehouses and governors renegotiated public employee contracts and federal leaders began proposing changes to how pensions are funded. The Governmental Accounting Standards Board that guides how state and local governments account for pensions, began demanding more disclosure on unfunded liabilities and sought to change how poorly funded pensions project investment returns and "smooth" out liabilities over many years.

As the stock market has rebounded, states are pitching in more - all leading to a turnaround in many pensions' finances. Pension assets surpassed pre-recession peaks this year to set new record highs, according to the U.S. Census.

This is the second year in a row that Wisconsin has ranked highest in funding for its public retirement system in Morningstar's survey.

Other reports, including the Pew Charitable Trusts annual analysis of pension funding, have long hailed Wisconsin's retirement system, even before Governor Scott Walker and the Republican-led statehouse crafted major changes to public employee compensation that plunged the state into political tumult in 2011.

Photo

After wave of QE, onus shifts to leaders to boost economy

DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.