CHICAGO — Only seven state pension systems can lay claim to a strong 90% funded ratio while at least 21 states fall below a “fiscally sound” threshold of 70% funded, according to a new review of state pensions by Morningstar that highlights the per capita costs of those obligations.

Wisconsin leads its counterparts with best system, one that recorded just $132 million of unfunded liabilities and the strongest funded ratio of nearly 100%.

Meanwhile long-ailing Illinois lags behind all the rest with $82.9 billion of unfunded liabilities for a weak 43.3% funded ratio, according to the report, titled “State Pension Plans: A Deep Dive into Shortfalls and Surpluses.”

Illinois’ five funds have released more updated results that show, in fiscal 2012, the unfunded obligations worsened to $94.6 billion for a funded ratio of 40.4%.

Wisconsin, on the other hand, benefits from the ability to cut cost of living adjustments when the funds’ assets don’t support an increase.

“Our analysis of the fiscal health of state pension plan systems across the country found that creditworthiness varies greatly and is heavily dependent on the funded ratio and the unfunded liability per capita,” said municipal credit analyst Rachel Barkley.

Overall, 14 states have an unfunded obligation below $1,500 per capita which Morningstar considers a “good” ranking while 20 states have an unfunded liability of above $3,000 per capital which  Morningstar considers “poor.”

Morningstar called the per capita unfunded liability figures a major indicator of a system’s health since it represents how much each citizen would need to pay to pay down the obligation.

Wisconsin’s unfunded liability per resident is just $23 while Illinois’ is $6,505.

Alaska exceeds Illinois and all others with a UAAL of more than $10,000 per capita even though its system has a better funded ratio than Illinois of 59.2%.

Indiana has a funded ratio similar to Alaska but its per capita figure is just $2,284.

“This substantial disparity in the apparent fiscal health of the systems highlighted by these two data points reinforces Morningstar’s opinion that the UAAL per capita needs to be taken into consideration when analyzing pensions,” the Morningstar report reads.

The report provides a snapshot of each state’s assets, liabilities, unfunded liabilities, funded ratio, and per capita costs. It also provides an overview of emerging trends, red flags for investors, and it outlines the difficulties of comparing plans because of shortcomings in disclosure and transparency.

“Morningstar believes that pensions will play an integral role in determining a state’s fiscal health and overall credit quality, going forward,” the report reads, noting the heightened attention on the subject from the public, governments and investors.

The impact of reporting and accounting changes adopted by the Government Accounting Standards Board and effective over the next two years also stand to roil the funded status.

The report warns investors to watch for red flags that signal a deteriorating picture.

Such warning signs include a substantial unfunded pension liability, a low and-or declining funded ratio, a high UAAL per capita, annual contributions less than the actuarially required contribution, rapid increases in annual contributions, and pension costs accounting for a significant portion of general government spending.

The report also cautions investors to look closely at individual plans within a state’s system, as the aggregate may appear healthy while some individual plans are not.

Overall, Minnesota’s system is nearly 80% funded but its legislators fund is just 8.8% funded and its elective state officers fund is 0% funded.

Morningstar analysts said they don’t anticipate any easing of pension pressures citing a recent report from the actuarial firm Milliman, which pegged the funding gap of the largest 100 public pension funds at a combined $1.2 trillion.

Contributions could strain governments as they seek to fund those liabilities and reform efforts likely will continue.

Two of the country’s most populous states — California and Ohio — adopted reforms in 2012, while similar efforts have so far failed in Illinois, a factor that was cited by analysts in a series of rating downgrades.

The report is aimed at helping “investors to understand each state’s situation and the broader implications of their pension system’s financial status,” said Jeff Westergaard, Morningstar’s director of municipal analytics.

The research and analytics company launched its municipal research group earlier this year and said that it intends update the pension report on an annual basis.

An overview is available at http://global.morningstar.com/statepensions. The report was compiled from the most recent reported financial results of state systems and individual plans.

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