New Jersey Charged with Fraud by SEC

August 20, 2010

Administrative Proceeding: State of New Jersey

New Jersey has become the first state to ever be charged with civil fraud by the Securities and Exchange Commission. The SEC on Wednesday charged that in the course of selling municipal bonds to investors “the State misrepresented and failed to disclose material information regarding its under funding of New Jersey’s two largest pension plans, the Teachers’ Pension and Annuity Fund (“TPAF”) and the Public Employees’ Retirement System (“PERS”).”

State governments usually sell bonds as a way to raise money to fund specific projects. They borrow from investors with the promise to repay the debt later, plus interest. As a protection to investors, all bond issuers, state governments included, are required to provide investors with the information necessary for investors to make an informed decision regarding the level of risk associated with the investment.

New Jersey sold over $26 billion in bonds between 2001 and 2007, but the SEC charged that the state failed to inform investors that the state has not been fully funding its pension funds and cannot fully fund them in the future without raising taxes or cutting spending, which could impact the state’s ability to repay these bonds. According to the SEC, New Jersey’s

[…] misrepresentations and omissions created the fiscal illusion that TFAP and PERS were being adequately funded and masked the fact that New Jersey was unable to make contributions to TFAP and PERS without raising taxes or cutting other services, or otherwise impacting the budget. Accordingly, disclosure documents failed to provide adequate information for investors to evaluate the State’s ability to fund TFAP and PERS or the impact of the State’s pension obligations on the State’s financial condition.

No bonds have gone unpaid in New Jersey yet, but the state of public employee pensions will likely have serious ramifications for state taxes and spending in the years to come. State public employee pensions are in serious trouble all over the country as states have made generous promises to their employees without any way to pay for these benefits when the bills come due. An estimate from the Pew Center on the States put the total unfunded liability at $1 trillion. A less optimistic estimate by The Manhattan Institute has put the unfunded liability for teacher pensions alone at $933 billion. More on state employee pensions from ALEC.

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