WASHINGTON — Puerto Rico's pension funded ratio of 8.4% for 2012 was far worse than any of the 50 states, Morningstar, Inc., said in pension reports for 23 individual states and the territory it released on Wednesday.

The state with the next worst funded ratio — the percentage of actuarial accrued liabilities funded by the actuarial value of assets — was Illinois with 40.4%.

The report on Puerto Rico examines of the territory's three plans — the Employees' Retirement System, the Puerto Rico System of Annuities and Pensions for Teachers, and the Judiciary Retirement System.

The ERS is the largest of the three pension systems, accounting for more than 68% of total liabilities and a funded level of only 4.5%, according to the report. Puerto Rico's fiscal 2012 comprehensive annual financial report projected the fund would run out of assets during fiscal 2015.

"The Commonwealth's pension plans have historically been poorly managed, leading exceptionally low funded levels (currently 8.4%), which have declined further in recent years," the report said.

The plans unfunded actuarial accrued liability is "quite high" at almost $10,000 per capita, the report said.

Morningstar noted that Puerto Rico enacted "substantial additional pension reform" in April 2013, switching new ERS members to a defined contribution plan, while raising the retirement age, increasing employer contributions, and  lowering benefits for some public workers" covered by the plan.

"Though we view the recent reform package as a significant and necessary first step to prevent the system from running out of assets within the next 10 years, we believe that Puerto Rico's large pension liability will remain a large fiscal burden for the foreseeable future," Morningstar said.

The report also noted that $1.3 billion of pension assets are currently in the form of personal loans to members, reducing potential investment returns and liquidity levels.

The board of trustees for the ERS and JRS have lowered the maximum amount members are allowed to take out in personal loans to $5,000 from $15,000 and this should increase liquidity over time, the report said.

Market returns for the pension systems have fluctuated significantly, in part because of the recession and slow recovery. The systems have decreased their assumed rates of return to 6.0% from 6.4% to 6.6%.

Morningstar said Illinois' funded ratio of 40.4% for 2012 was the lowest among all the states, despite its previous issuance of pension obligation bonds. The state's total unfunded liability was $94.6 billion or $7,421 per capita, according to the report.

"The poor fiscal health of the plans is due to a combination of reasons, including historical borrowing from the plans by the state, state law requiring annual funding of less than the annual required contribution [ARC], below-expected investment returns, and weak funding methods," the report said, adding that "significant reforms will be necessary for the system to be solvent in the long term."

In contrast, Morningstar said the states with the highest funded levels were Wisconsin with 99.9%, Washington with 98.1%, North Carolina with 93.9%, South Dakota with 92.6% and Tennessee with 92.1%.

The state with the median funded level was Vermont with 68.4%, a funded ratio that is below the fiscally sound threshold of 70%.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.