10 scariest states ranked by pension promises

States' unfunded pension liabilities total more than $15,000 per American. States' unfunded pension liabilities total more than $15,000 per American.

If the nation had an actuary-in-chief whose job it was to examine the 50 states’ pension systems, he might declare that the state of the states is “bleak.”

That’s the word used by State Budget Solutions, a nonpartisan think tank on state fiscal issues that has appointed itself actuarial ombudsman on the states’ unfunded pension liabilities, which now top $4.7 trillion, or over $15,000 for every American.

While an 80 percent “funded ratio” is conventional actuary-speak for a sound plan, or at least one we’re not overly alarmed about, the states’ plans fall short of that standard with a combined funded status of just 36 percent. And that funding level for 2013 is 3 percentage points lower than the previous year, despite robust stock market gains.

The level of investment returns is a relevant factor, since government pension plans have long been criticized for using unrealistic return assumptions, meaning that they will be able to make good on their pension promises through annual investment returns of, say, 8.5 percent.

While investment advisors understand that such goals may be overly optimistic, state budgeters may find it easier to rely on the market to deliver the growth they need to fund pensions.

That enables them to divert resources to other priorities.

Thus, the assumption of investment growth enables hard-pressed state governments to make modest or in some cases no actual contributions to their languishing pension funds.

The pension shortfalls also have implications for taxpayers.

They may end up retaining less of their income to fund their politicians’ promises, or see expected services shrink as an increasing share of their state’s budget goes to fund retiree pensions that are typically more generous than the defined contribution plans that have become the norm in the private sector.

With a funded ratio of just 36 percent of their pension obligations, on average, the result is that the most troubled states are at dire levels of funding while even the best-funded states have less than impressive funding status. Herewith are the 10 worst state pension systems, by funding ratio and a little added detail about per capita liability per state resident, according to State Budget Solutions’ 2014 report.

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10. North Dakota

Percent Funded: 29%

The per capita liability of the average North Dakota resident is $12,192.

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9. Massachusetts

Percent Funded: 29%

The per capita state pension liability of the average Massachusetts resident is $15,545 — higher than the national average of $15,052.

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8. Hawaii

Percent Funded: 29%

The per capita liability of the average Hawaii resident is $21,852 — far higher than the national average.

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7. New Hampshire

Percent Funded: 28%

The per capita liability of the average New Hampshire resident is $12,026.

6. Kansas

Percent Funded: 28%

The per capita liability of the average Kansas resident is $12,762.

5. Mississippi

Percent Funded: 27%

The per capita liability of the average Mississippi resident is $18,722.

4. Alaska

Percent Funded: 25%

The per capita liability of the average Alaska resident is $40,639 — the highest of all the states — and its pension system is merely one-quarter funded.

3. Kentucky

Percent Funded: 24%

The per capita liability of the average Kentucky resident is $18,976.

2. Connecticut

Percent Funded: 23%

The per capita liability of the average Connecticut resident is $24,080.

1. Illinois

Percent Funded: 22%

Illinois' financial illness is more severe than might initially appear. Its pension system is only one-fifth funded. Also, the per capita liability of the average Illinois resident is $25,740 — far higher than the average for all the states.

Worse still, its unfunded liability as a percentage of 2013 gross state product comes in at 46 percent (29 percent is the average for all states); in that category, Alaska and New Mexico were worse (each at 50 percent) and Ohio (51 percent) worst of all. But Illinois’ pension system suffers from a triple whammy of bad comparative results in all three factors.

In 2013, the state settled fraud charges by the Securities and Exchange Commission, which accused it of misleading bond investors about the health of its pension system. It admitted no wrongdoing.

See also:

10 least tax-friendly states for retirees

Benefit clawbacks: Only way to avoid a pension cliff?

Best and worst states for military retirees [infographic]

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