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Most states' pension plans inadequately funded

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The news of late regarding state and local pension plans has been a tale of woe. Many jurisdictions are under a mountain of debt and struggling to fund their fiscal obligations to retired state employees.

New research from Morningstar indicates just how widespread the problem is at the state level. In a report, “The State of State Pension Plans 2013,” Morningstar indicates that 26 states are failing to adequately fund their pension liabilities.

“While some states are adequately managing their pension liabilities, the majority of state pension systems are coming under duress,” the report states. “The fiscal solvency and management of these plans varies greatly…”

In aggregate, state pension plans are 72.6 percent funded with an unfunded actuarial accrued liability (UAAL) per capita of about $2,600, the report indicates.

Six states have funding levels of more than 90 percent, while seven have UAALs of less than $100 per capita. A dozen states have funded ratios (calculated by dividing pension plan assets by their liabilities) of at least 80 percent, which Morningstar views as “strong.”

However, the report observes, 26 states fail to meet the funded ratio (70 percent) that Morningstar has deemed to be “fiscally sound.” The worst of the states, Illinois, has a funded ratio of 40.4 percent and a 72,421 per capita UAL.

Puerto Rico’s performance is still more abysmal with an aggregate 11.2 funded level and a UAAL per capital of greater than $8,900.

“In aggregate, state pension funded levels continued to decline in 2012, although the annual drop in funded percentage was moderate at 2.1 percent,” the report states. “Growth in liabilities outpaced that of assets, partially because entities are still absorbing asset losses from the recession…”

“Despite the overall poor funded level of these plans, recent research by the Federal Reserve Bank of Cleveland found no evidence that pension obligations were being priced in as a potential threat to a state’s overall credit quality when market participants were purchasing municipal bonds,” the report adds.

In closing, the Morningstar study urges states to adhere to several guidelines to insure the long-term financial health of their pension plans, including:

  • Fully funding the plans’ annual required contributions (ARC);
  • Actively managing pension plan liabilities; and
  • Periodically reviewing the plans’ actuarial assumptions and investment portfolios. 


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