Report says Alaska has highest unfunded state pensions liability
November 26, 2012
Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, in a research report published today, "The State of State Pension Plans: A Deep Dive into Shortfalls and Surpluses," has analyzed current data for pension plans administered by all 50 states. Morningstar's municipal credit analysts found that based on two key funding metrics, the state of Wisconsin had the strongest-funded pension plan system, while Illinois had the weakest.
One of the key findings reported Alaska has the highest Unfunded Actuarial Accrued Liability (UAAL) Per Capita of $10,000, this is despite its higher, although still poor, funded ratio of 59.2%. This means, each person in Alaska would need to pay $10,000 to fully fund Alaska's unfunded pensions liability.
Morningstar's analysis of the fiscal health of state pension plan systems across the United States found that creditworthiness varied greatly and is heavily dependent on the funded ratio and the unfunded liability per capita - both key metrics to evaluate each state's system. The two key metrics focused on:
"We find the UAAL metric useful because it represents the burden on residents, though it isn't widely used in the industry as an evaluation tool," said Rachel Barkley, municipal credit analyst for Morningstar. "Not only do state pension plan systems represent the state's financial obligations, but they are often structured as umbrella plans that also cover employees in the state's local government bodies. Because pension liabilities represent significant long-term obligations for government entities, pensions are an important element in determining a municipal entity's credit quality."
Jeff Westergaard, Morningstar's director of municipal analytics, added, "We've heard much discourse on the subject of pensions over the last few years, resulting in more confusion than clarity on how to view this important area of municipal finance. Our hope is that Morningstar's analysis will help cut through the clutter and offer logical, clear analysis for investors to understand each state's situation and the broader implications of their pension system's financial status."
Key conclusions from Morningstar's review of state pension plan systems include:
Morningstar's state pensions research report also includes an evaluation of trends across the country, challenges of comparing state pension plans, shortcomings in disclosure and transparency, and expectations about pension reform. Morningstar analysts also compiled aggregate pension data by state, including assets, funded ratio, and UAAL per capita, along with individual pension plan data by state.
What Can Be the Impact for Governments?
Morningstar notes that many governments have been able to manage their pension liabilities while continuing to maintain adequate fiscal solvency. However, state and local governments have been facing considerable budgetary pressure for the past few years. Labor-related costs, including pension payments, continue to account for a significant portion of total government spending. Required pension payments have escalated in many places as plans have absorbed investment losses associated with the recession, adding further stress to a government’s fiscal profile. Investment losses have also increased unfunded pension liabilities, which can create a looming fiscal obstacle that will have to be funded in future years. Failure to adequately manage pension obligations has led to a decline in overall credit quality for some entities.
Morningstar plans to update its research on state pension plans annually.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company has operations in 27 countries.
Edited by Mary Kauffman, SitNews
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