The majority of states are "adequately managing" their pension liabilities, Morningstar found in a report released this week. The company analyzed current data for pension plans in all 50 states to determine how able they were to meet obligations.
The two most important factors in determining the health of a pension system were the funded ratio and the unfunded actuarial accrued liability (UAAL) per capita, according to the report, "The State of State Pension Plans: A Deep Dive into Shortfalls and Surpluses." The UAAL per capita is the amount each person in the state would have to pay to make up the unfunded gap.
While states' pension health varies widely, the company found 29 states have a pension funded ratio of at least 70%, the level at which Morningstar considers a pension fiscally sound. Thirteen states have a funded ratio above 80% and seven are able to pay 90% of their obligations.
Furthermore, eight states have a UAAL per capita of under $1,000. In fact, Wisconsin has a UAAL per capita of less than $100 and has done so for the five years of data provided in the report. Morningstar noted that the UAAL per capita and the funded ratio are roughly correlated. Morningstar also found that most states have seen their funded ratio fall while their UAAL per capita rises.
Morningstar found that 21 states were seriously underfunded, with a funded ratio of less than 69% and 20 with a UAAL per capita that is over $3,000.
Morningstar noted that it's difficult to compare pensions directly because they differ in the types of benefits they offer and who is contributing to the plan. Plans may be defined benefit, defined contribution or a hybrid, and may be a single-employer or multi-employer plan. Morningstar found that multi-employer plans can inflate liabilities.
Morningstar argued that pension systems, especially multi-employer plans, need more transparency. Sometimes the plan documents don't even specify whether the state is a contributor to a plan or simply acts as a fiduciary.
The good news, Morningstar said, is that pensions' fiscal health changes slowly, and struggling plans are often identified years before they suffer substantial stress on their funding. Investors should take note of plans that have a significant unfunded liability, a funded ratio that is low or falling, high UAAL per capita, annual contributions that are lower than the required level or that increase quickly, and pension costs that make up a significant portion of government spending.
Please continue to find out the 10 Best & Worst State Pension Systems:
5th Best
Tennessee
Funded Ratio: 92.1%
UAAL Per Capita: $415
Assets: $30.1 million
Actuarial Accrued Liability (AAL): $32.7 million
Unfunded Actuarial Accrued Liability (UAAL): $2.6 million
4th Best
North Carolina
Funded Ratio: 95.3%
UAAL Per Capita: $311
Assets: $58 million
AAL: $60.9 million
UAAL: $2.8 million
3rd Best
South Dakota
Funded Ratio: 96.3%
UAAL Per Capita: $362
Assets: $7.5 million
AAL: $7.8 million
UAAL: $289,389
(Photo: AP)
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