But one of the worst-fundedstate pensions was lauded by the Volcker Alliance for its progresson pensions, raising the state's three-year average grade on legacycosts to a C this year.(Photo: Shutterstock)

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(Bloomberg) –It's a math test that New Jersey, Illinois, andeven Texas are nearly failing: How to pay for billions of dollarsin unfunded liabilities for public-employee pensions and retiree healthcare.

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Related: Most employees with public pensions that areunderfunded don't know it

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They were among the six states that received a D minus grade,the lowest one possible, in a new report by the Volcker Alliancethat scored how they've dealt with looming legacy costs over thepast three years.

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Hawaii, Massachusetts, and Wyoming also received bottom grades,according to the non-profit organization founded by former FederalReserve Chairman Paul Volcker to raise alarm bells about thelong-term financial problems facing U.S. states.

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“The costs increasingly threaten to crowd out spending oneducation, infrastructure, and other critical needs,” the reportsaid.

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Sixteen other states didn't do much better, earning an average Dgrade for the three-year period between 2016 and 2018. Just eightearned an A.

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Related: 5 worst, 5 best states for pensionfunding

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Still, states are starting to do a better job at contributingthe amount recommend by actuaries to their retirement systems. Just 12failed to make the actuarially required contribution in 2018, downfrom 16 in 2015, the report notes.

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Kentucky, which has one of the worst-funded state pensions, waslauded by the Volcker Alliance for its progress on pensions,raising the state's three-year average grade on legacy costs to a Cthis year.

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It boosted its contributions to pensions during the past twoyears after underfunding them for years, the report said.

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It's not easy for states to take on pension costs since benefitsare often protected by state law. In 2015, the Illinois SupremeCourt struck down a 2013 pension overhaul, saying it violated thestate constitution's ban on reducing retirement benefits.

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“Devising a durable strategy to cover retirement promises madeto public workers while continuing to provide essential services isa truly arduous task,” the report said.

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READ MORE:

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10 states with the best pensionfunding

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Why returns on public pensions vary:CRR

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How public sector retirement plan sponsors cansucceed in the evolving government arena

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Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.

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