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Wisconsin, Illinois far apart on public pension funding: report

(Reuters) - Wisconsin and Illinois share the shoreline of Lake Michigan but when it comes to the health of their state public pension funds, they are polar opposites - one sits at the top and the other at the bottom in a new ranking of U.S. states released on Monday.

The rankings, compiled by investment research firm Morningstar Inc, looked at the liabilities of taxpayers on a per-capita basis for the pension funds administered by 50 states, as well as the more traditional measure of how well or poorly the programs are funded.

"Wisconsin had the strongest-funded pension system," the study said, noting the state's good management and pension reforms over the years. "Illinois had the weakest-funded system."

The cost of funding public pensions has become a controversial issue in many U.S. states and cities which are struggling with lower revenue in the wake of the economic recession and higher costs, not only for pensions but also for services such as public safety, healthcare and education.

Wisconsin residents faced a liability of just $23 each for their state's public pension system, which was 99.8 percent funded in fiscal 2011. That contrasted with Illinois, where the funded ratio was just 43.4 percent.

Illinois, home to the city of Chicago and the fifth-most populous state in the United States, has missed payments to its pension fund in some years and in other years has underpaid.

Fresh data reported by an Illinois legislative commission last week, after the completion of Morningstar's report, showed the state's total unfunded liability rose considerably at the end of fiscal 2012 to $96.8 billion, while the funded ratio sank to 39 percent. Morningstar said outside its report that this would increase the unfunded actuarial accrued liability (UAAL) per capita to roughly $7,500.

Factors behind the jump include contributions by the state government and other public entities which were below the annual required contribution (ARC) - funding needed to cover benefits plus a part of unfunded liabilities - and weaker-than-expected investment returns.

Another strain came from a decrease to 8 percent from 8.5 percent in the assumed investment rate of the state's Teachers' Retirement System (TRS), which makes up roughly half of the total state liability, said Rachel Barkley, municipal credit analyst for Morningstar.

"The Illinois plan has been chronically stressed with poor management decisions adding a substantial amount of strain," she said.

This contrasts with Wisconsin, where the pension system has historically had strong management and employer contributions have regularly met 100 percent or more of their required levels, according to Morningstar. Investment assumptions are more realistic at a moderate at 7.2 percent.

The state moved to shore up its pension system by passing reforms in 2011 to help ensure the continued stability of the plan, including increasing employee contribution levels and tougher requirements for new hires.

Illinois approved some public pension reforms for new workers in 2010 but so far this year has failed to pass an additional overhaul, in the face of strong opposition from unions and political bickering.

ALASKA A SPECIAL CASE

Even the state with the highest shortfall in its public worker pension fund per individual taxpayer - Alaska, with a per-capita liability of $10,000 - is considered better off than Illinois. Its funding ratio stood at 59.2 percent in fiscal 2011, and revenue from its energy industry will help make up the difference.

"Alaska has a very different funding mechanism than other states," Barkley said.

Illinois depends largely on income and sales taxes, putting a larger proportion of total state funding on the backs of its residents, she added.

While most states considered to be in poor shape with their public pension funds suffer from both low funding levels and a high per-capita liability, there are notable exceptions, the study said, underscoring the importance of using both metrics.

In Indiana, the funded ratio of 59.6 percent is basically at par with that of Alaska, but its unfunded gap per-capita is only $2,284.

Some caution is needed when making state-by-state comparisons, said Keith Brainard, research director for the National Association of State Retirement Administrators. Not all unfunded liabilities are created equal, "and degree of legal protections varies from one plan and state to another," Brainard said, noting that pension obligations are nearly impossible to change under the law in some states, but in other states are more flexible.

"A side-by-side comparison generally will not reflect these different circumstances, and will mislead readers about the meaning of the numbers," he said.

States can also manage different pension plans. For example, there is a huge difference between those states that run teachers' pensions and those that do not.

In Colorado, which does not contribute to teachers' plans, the gap for each taxpayer is moderate at $1,804 despite a low funded ratio of 57.7 percent. Morningstar notes that the fact that teachers' liabilities are not covered by the plan does not mean that Colorado taxpayers are not ultimately liable for the funding.

(Reporting by Tiziana Barghini in New York; editing by Karen Pierog and Matthew Lewis)

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