* Illinois has weakest system, Wisconsin the best -study
* Alaska has the highest liability per capita
* Not all unfunded liabilities are created equal
* Cost of funding public pensions has become controversial
Nov 26 Wisconsin and Illinois share the
shoreline of Lake Michigan but when it comes to the health of
their state public pension funds, they are polar opposites - one
sits at the top and the other at the bottom in a new ranking of
U.S. states released on Monday.
The rankings, compiled by investment research firm
Morningstar Inc, looked at the liabilities of taxpayers
on a per-capita basis for the pension funds administered by 50
states, as well as the more traditional measure of how well or
poorly the programs are funded.
"Wisconsin had the strongest-funded pension system," the
study said, noting the state's good management and pension
reforms over the years. "Illinois had the weakest-funded
The cost of funding public pensions has become a
controversial issue in many U.S. states and cities which are
struggling with lower revenue in the wake of the economic
recession and higher costs, not only for pensions but also for
services such as public safety, healthcare and education.
Wisconsin residents faced a liability of just $23 each for
their state's public pension system, which was 99.8 percent
funded in fiscal 2011. That contrasted with Illinois, where the
funded ratio was just 43.4 percent.
Illinois, home to the city of Chicago and the fifth-most
populous state in the United States, has missed payments to its
pension fund in some years and in other years has underpaid.
Fresh data reported by an Illinois legislative commission
last week, after the completion of Morningstar's report, showed
the state's total unfunded liability rose considerably at the
end of fiscal 2012 to $96.8 billion, while the funded ratio sank
to 39 percent. Morningstar said outside its report that this
would increase the unfunded actuarial accrued liability (UAAL)
per capita to roughly $7,500.
Factors behind the jump include contributions by the state
government and other public entities which were below the annual
required contribution (ARC) - funding needed to cover benefits
plus a part of unfunded liabilities - and weaker-than-expected
Another strain came from a decrease to 8 percent from 8.5
percent in the assumed investment rate of the state's Teachers'
Retirement System (TRS), which makes up roughly half of the
total state liability, said Rachel Barkley, municipal credit
analyst for Morningstar.
"The Illinois plan has been chronically stressed with poor
management decisions adding a substantial amount of strain," she
This contrasts with Wisconsin, where the pension system has
historically had strong management and employer contributions
have regularly met 100 percent or more of their required levels,
according to Morningstar. Investment assumptions are more
realistic at a moderate at 7.2 percent.
The state moved to shore up its pension system by passing
reforms in 2011 to help ensure the continued stability of the
plan, including increasing employee contribution levels and
tougher requirements for new hires.
Illinois approved some public pension reforms for new workers
in 2010 but so far this year has failed to pass an additional
overhaul, in the face of strong opposition from unions and
ALASKA A SPECIAL CASE
Even the state with the highest shortfall in its public
worker pension fund per individual taxpayer - Alaska, with a
per-capita liability of $10,000 - is considered better off than
Illinois. Its funding ratio stood at 59.2 percent in fiscal
2011, and revenue from its energy industry will help make up the
"Alaska has a very different funding mechanism than other
states," Barkley said.
Illinois depends largely on income and sales taxes, putting
a larger proportion of total state funding on the backs of its
residents, she added.
While most states considered to be in poor shape with their
public pension funds suffer from both low funding levels and a
high per-capita liability, there are notable exceptions, the
study said, underscoring the importance of using both metrics.
In Indiana, the funded ratio of 59.6 percent is basically at
par with that of Alaska, but its unfunded gap per-capita is only
Some caution is needed when making state-by-state
comparisons, said Keith Brainard, research director for the
National Association of State Retirement Administrators. Not all
unfunded liabilities are created equal, "and degree of legal
protections varies from one plan and state to another," Brainard
said, noting that pension obligations are nearly impossible to
change under the law in some states, but in other states are
"A side-by-side comparison generally will not reflect these
different circumstances, and will mislead readers about the
meaning of the numbers," he said.
States can also manage different pension plans. For example,
there is a huge difference between those states that run
teachers' pensions and those that do not.
In Colorado, which does not contribute to teachers' plans,
the gap for each taxpayer is moderate at $1,804 despite a low
funded ratio of 57.7 percent. Morningstar notes that the fact
that teachers' liabilities are not covered by the plan does not
mean that Colorado taxpayers are not ultimately liable for the