WASHINGTON, D.C. – The Securities and Exchange Commission on Monday said the state of Illinois committed securities fraud by misleading municipal bond investors about how the state funds its public pensions.
An SEC investigation “revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009,” according to a statement.
“Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan,” the commission said.
Illinois agreed to settle the charges, the SEC said.
“Municipal investors are no less entitled to truthful risk disclosures than other investors,” George S. Canellos, acting director of the SEC’s Division of Enforcement, said in the statement. “Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system.”
Elaine Greenberg, chief of the SEC’s Municipal Securities and Public Pensions Unit, said “Regardless of the funding methodology they choose, municipal issuers must provide accurate and complete pension disclosures including the effects of material changes to their pension plans.”
The SEC’s said Illinois “established a 50-year pension contribution schedule in the Illinois Pension Funding Act that was enacted in 1994. The schedule proved insufficient to cover both the cost of benefits accrued in a current year and a payment to amortize the plans’ unfunded actuarial liability. The statutory plan structurally underfunded the state’s pension obligations and backloaded the majority of pension contributions far into the future. This structure imposed significant stress on the pension systems and the state’s ability to meet its competing obligations – a condition that worsened over time.”
The SEC said the state misled investors about how changes to the funding plan would effect the pension, especially pension holidays that were enacted in 2005.
“Although the state disclosed the pension holidays and other legislative amendments to the plan, Illinois did not disclose the effect of those changes on the contribution schedule and its ability to meet its pension obligations,” the SEC said. “The state’s misleading disclosures resulted from various institutional failures. As a result, Illinois lacked proper mechanisms to identify and evaluate relevant information about its pension systems into its disclosures. For example, Illinois had not adopted or implemented sufficient controls, policies, or procedures to ensure that material information about the state’s pension plan was assembled and communicated to individuals responsible for bond disclosures. The state also did not adequately train personnel involved in the disclosure process or retain disclosure counsel.”
By Kelly Carson
“This article first appeared on Franklin Center. Reproduced with permission”
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