Wisconsin has the nation’s strongest pension plan, while Illinois has the worst, according to a new report. And the situation across states is starting to moderate.
On average, state pension plans are roughly 73 percent funded, according to Morningstar, an investor research company that puts together the annual report. While experts consider many factors, a funded ratio of 80 percent or better is considered to be a rough measure of a healthy plan. Funding ratios dropped last year, thanks to deferred losses from the economic downturn, but the situation is improving, the report’s author Rachel Barkley says.
“I would say it’s definitely moderating,” she said. “You’re not seeing the fast declines that you did a few years ago.”
Pensions are often among the largest obligations states have and play a critical role in determining fiscal health and credit quality. Despite the building economic recovery, state pensions weakened last year with their funded status dropping about 2 percent, due in part to deferred losses from the downturn, according to Morningstar.
Wisconsin’s public pension was 99.9 percent funded, with unfunded liabilities of $18 per capita. Five other states — New York, North Carolina, South Dakota, Tennessee and Washington — all also were funded at 90 percent or more. Six states had less than $100 in per capita unfunded liabilities, according to the report. A total of 12 states were funded above the often-recommended 80 percent cutoff.
Some 26 states had a funded ratio of 70 percent or less. Illinois was the worst with a ratio of 40.4 percent and a per capita unfunded liability of $7,421. Pensions in Connecticut and Kentucky were also below 50 percent funded.
Because pension plans spread out gains and losses over a period of years, many are still documenting losses from the Great Recession. Low funding ratios and high per-capita unfunded liabilities are telltale signs of a weak pension plan, according to the report. But so, too, are rapid increases in annual contributions and pension costs that account for a major chunk of a state government’s general government spending.
While Morningstar’s report paints a weak one-year snapshot, pension plans have had higher-than-expected returns on their investments over the past quarter-century despite three recessions, according to a March report from the National Association of State Retirement Administrators.
And state officials have undertaken serious reforms in the aftermath of the downturn, a February report from the Boston College Center for Retirement Research found. Still, the Center warned that the future health of state pension plans relies on “a degree of fiscal discipline that has been lacking in some jurisdictions.”