SEC says Illinois misled investors over pension funding

The Securities and Exchange Commission slapped Illinois with securities fraud charges today, claiming that the state misled municipal bond investors about how it funded its pension liabilities.
The federal regulator today filed an order instituting cease-and-desist proceedings against the state, stating that it raised more than $2.2 billion from 2005 to early 2009 in a series of bond offerings. Investors in those offerings were not made fully aware of Illinois’ underfunded pension plans and the risks to the state’s condition, according to the SEC.
The state agreed to settle the charges without admitting or denying the findings.
“Having a resolution and not an open-ended inquiry is a positive for the state to move forward for future bond issuance,” said Bridget Byron, executive director of finance at the Illinois state treasurer’s office.
According to the SEC, Illinois’ pension system was underfunded by $83 billion in 2011, with assets in the system covering only 43% of its liabilities.
In 1995, the Illinois General Assembly put into effect a statutory funding plan to try to improve the pension systems’ funding status. The goal was to reach a 90%-funded ratio by 2045, according to the SEC. But rather than immediately funding plan contributions, state legislators gradually increased them over a 15-year-period, the regulator claimed.
That contribution schedule set back the state in closing its liability gap and pushed the burden of covering those pension expenses into the future. It didn’t help that there were two years — 2006 and 2007 — in which the legislature cut those contributions and did not compensate for those cuts with funding increases in subsequent years, according to the order.
“For the majority of the years under the Statutory Funding Plan, the state’s annual required contributions were insufficient to prevent the growth of its unfunded liability,” the SEC said. Between 1996 and 2010, the state’s unfunded pension liabilities rose by $57 billion, with “insufficient contributions under the Statutory Funding Plan … the primary driver of this increase,” outweighing market performance and benefit changes, the regulator claimed.
Illinois took some remedial steps in April 2009 when it provided muni bond investors with a link to a monthly briefing from the state’s Commission on Government Forecasting and Accountability. That report had information on the drop in state pension plan assets.
The state also put together a Pension Modernization Task Force in June 2009 to evaluate the structure of its pension systems, the SEC noted. In February 2011, the state made “significant corrective disclosures” in connection with a bond offering, including details on the background of its pension systems and contribution history, the SEC noted.
The state provides funding for five defined-benefit pension plans: The Teachers’ Retirement System, the State Universities Retirement System, the State Employees’ Retirement System, the Judges’ Retirement System and the General Assembly Retirement System.
Though the settlement was between the SEC and the governor’s office, the state treasurer’s office receives bond proceeds, Ms. Byron noted.
This isn’t the first time the SEC has charged a state for fraudulent muni bond offerings. Three years ago, the SEC filed similar charges against New Jersey for failure to disclose to investors that it was underfunding two of the state’s biggest pension plans.