State pension systems suffered a significant blow during the recession, but it didn’t hit all systems equally; some fared much worse than others.

A study by investment research firm Morningstar, Inc., published earlier this week assesses the financial health of each state system, highlighting a wide disparity in the actuarial adequacy of funding levels.

An alarming number of funds face a steep uphill climb in fully funding their plans. The report found 21 states’ aggregate funded ratios fell below 70 percent, which Morningstar considers the threshold for “fiscally sound” systems. Illinois (43.4 percent), Kentucky (50.5 percent) and Connecticut (53.4 percent) registered the lowest funding levels of all examined.

The common industry standard for a “healthy” system is that it’s 80 percent funded when looking at obligations to retirees, although the number is the subject of debate.

Morningstar also appraised states’ fiscal health by calculating the unfunded actuarial accrued liability per capita, approximating the amount for which taxpayers would be on the hook if each had to ante up to make the systems whole. By this measure, Alaska tops all other states with an unfunded liability of $10,235 per resident for its plans, followed by Illinois and Hawaii.

Other states have managed to largely shore up their funds. Eight states recorded unfunded liabilities of less than $1,000 per capita, while seven systems’ aggregate funding ratios exceeded 90 percent. The report lauded Wisconsin – with a 99.8 percent funded ratio for its system -- as the nation’s strongest.

While declines have slowed in recent years, the figures dating back to 2007 still signal a downward slope for most systems’ funding levels. Much of this has to do with “smoothing,” an accounting practice that considers deviation between actual and expected returns over several years, essentially spreading out pension gains or losses over longer periods. Since most assume a five-year smoothing period, many funds have not yet fully absorbed investment losses to their portfolios incurred during the recession.

Rachel Barkley, a Morningstar municipal credit analyst who authored the report, cited the financial health of Illinois’ pension system as particularly poor. Updated data released by the state last week indicates the situation has worsened, with the aggregate funded ratio further dropping from 43 to 39 percent. The culprit in Illinois has largely been due to the failure of the state to make the necessary contributions to the pension fund to maintain its actuarial integrity compounded by less than stellar returns, she said.

“It’s been chronically stressed with poor management decisions,” Barkley told Governing.

Illinois’ investment returns failed to meet assumptions, while contributions from the state and local governments ended up below the annual required contribution. The state legislature passed reforms aimed at replenishing the system in 2011, but failed to approve additional measures during a special session this fall.

The following map shows funding ratios Morningstar compiled, with green states reporting the highest ratios:


Some separate retirement funds within single states are also in far worse shape than others, but this disparity is hidden because the report uses aggregate totals for all public employee systems. Minnesota’s various retirement plans for rank and file and other covered employees were collectively 79.3 percent funded, for example, but its Legislators Retirement Plan was actually less than 9 percent funded.

Pension plans for teachers and education employees, which account for about half the public workforce, make up a sizable portion of states’ liability. Not all states, though, contribute to teachers’ pension plans. Colorado, one such state, recorded an unfunded liability per capita of $1,804 – below most others, which might give the impression that the fund is relatively healthy. But it isn’t. The system's funded ratio was 57.7 percent, far worse than most states.

It’s for this reason that Barkley suggests weighing the health of pensions both by actuarial calculations and by the per capita method when assessing the overall health of a pension system.

While Morningstar set a 70 percent threshold for fiscally sound systems, and other credit rating agencies peg it at 80 percent, the American Academy of Actuaries went a step further earlier this year, calling the 80 percent funded ratio a “myth.” Plans should aim for accumulating assets of 100 percent of pension obligations, the association said in an issue brief.

Keith Brainard, research director for the National Association of State Retirement Administrators, said the report accurately depicted the dynamics of state pension systems. He emphasized, though, direct comparisons between state plans’ financial health can be deceptive.

“Public pension plans are nuanced and distinctive creatures of state government,” he said. “Sweeping statements and broad generalities about the public pension community are usually misleading at best.”

The Morningstar report also cautions against direct comparisons. Benefit types vary, and multiple public entities are often responsible for contributions and liabilities associated with plans.

What’s more, plan management strategies and assumptions differ. Most plans assume an investment return rate of 7 to 8 percent. The Indiana Public Retirement System, though, recently adopted an assumed return rate of 6.75 percent – the nation’s most conservative rate, according to the state.

The following table shows funded ratios and unfunded actuarial accrued liability per capita ratios for each state, which Morningstar compiled from CAFR reports and data from state fiscal agencies. Please consider the caveats above before making comparisons between states. Additional figures are listed in the Morningstar report.

 

             
State 2009 Funded 2009 Unfunded Liability/Capita 2010 Funded 2010 Unfunded Liability/Capita 2011 Funded 2011 Unfunded Liability/Capita
Alabama 73.9% 2,307 70.3% 2,706 66.9% 3,059
Alaska 61.1% 8,641 59.5% 9,717 59.2% 10,235
Arizona 78.9% 1,237 76.2% 1,464 75.0% 1,592
Arkansas 77.5% 1,781 74.8% 2,092 72.5% 2,412
California 80.6% 2,557 78.2% 3,022 77.1% 3,249
Colorado 67.0% 1,349 62.8% 1,548 57.7% 1,804
Connecticut 61.6% 11,651 61.6% 11,651 53.4% 5,885
Delaware 94.5% 467 92.1% 693 90.7% 870
Florida 87.1% 951 86.6% 1,011 86.9% 1,024
Georgia 90.7% 741 87.9% 975 83.8% 1,376
Hawaii 64.6% 4,676 61.4% 5,353 59.4% 6,114
Idaho 73.6% 2,087 78.4% 1,774 89.9% 853
Illinois 50.6% 4,899 45.4% 5,943 43.4% 6,505
Indiana 63.4% 1,916 61.8% 2,103 59.6% 2,284
Iowa 80.9% 1,686 81.0% 1,701 79.5% 1,959
Kansas 63.7% 2,729 62.2% 2,942 59.2% 3,285
Kentucky 58.2% 3,481 54.3% 3,944 50.5% 4,488
Louisiana 69.9% 2,175 55.6% 3,921 56.0% 3,975
Maine 67.9% 3,008 66.2% 3,243 77.6% 1,913
Maryland 65.0% 3,238 64.1% 3,405 64.7% 3,465
Massachusetts 63.8% 3,141 68.7% 2,828 72.6% 2,589
Michigan 83.6% 1,157 78.9% 1,549 71.5% 2,228
Minnesota 79.6% 2,463 80.8% 2,238 79.3% 2,448
Mississippi 67.4% 3,434 64.2% 3,872 62.3% 4,242
Missouri 78.0% 1,821 75.5% 2,095 80.8% 1,564
Montana 74.3% 2,717 70.0% 3,405 66.3% 3,965
Nebraska 87.5% 643 83.6% 888 81.5% 1,059
Nevada 72.4% 3,468 70.5% 3,944 70.1% 4,192
New Hampshire 58.5% 2,696 58.6% 2,843 57.5% 3,252
New Jersey 66.6% 5,104 69.2% 4,448 67.5% 4,786
New Mexico 76.2% 3,432 72.4% 4,136 67.0% 5,310
New York 101.5% -111 94.3% 461 90.5% 814
North Carolina 99.2% 46 95.9% 264 95.3% 311
North Dakota 85.8% 437 74.5% 903 71.7% 1,061
Ohio 75.2% 1,603 75.2% 1,672 78.9% 1,496
Oklahoma 57.7% 3,653 56.1% 3,968 67.0% 2,603
Oregon 80.2% 2,855 85.8% 2,148 86.9% 2,059
Pennsylvania 80.8% 1,691 75.1% 2,334 67.8% 3,264
Rhode Island 58.7% 4,495 61.3% 3,892 58.6% 4,230
South Carolina 70.1% 2,672 68.6% 2,923 66.5% 3,265
South Dakota 91.7% 776 96.1% 365 96.3% 362
Tennessee 90.6% 436     92.1% 415
Texas 84.1% 1,016 83.3% 1,126 82.9% 1,188
Utah 85.8% 1,301 82.7% 1,660 78.3% 2,198
Vermont 71.1% 1,689 72.7% 1,611 70.4% 1,909
Virginia 83.5% 1,369 79.7% 1,787 72.0% 2,707
Washington 89.6% 907 92.5% 657 98.1% 160
West Virginia 63.6% 2,699 55.9% 3,417 57.9% 3,427
Wisconsin 99.7% 45 99.8% 34 99.8% 23
Wyoming 88.8% 1,522 85.9% 1,999 83.0% 2,486