SEC Slaps Illinois over Public Pension System Misrepresentations

March 15, 2013

Illinois has agreed to settle, without admitting wrongdoing, charges by the Securities and Exchange Commission (SEC) that the state misrepresented the financial health of the public employee pension system and what the impact of chronic underfunding would be. The system is now at least $96.7 billion short of what it has promised retirees—barely 40 percent funded.

From the SEC order:

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’s order finds that Illinois misled investors about the effect of changes to its funding plan, particularly pension holidays 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 state’s misleading disclosures resulted from various institutional failures.[…]

This enforcement action marks the second time that the SEC has charged a state with violating federal securities laws in their public pension disclosures. The SEC charged New Jersey in 2010 with misleading municipal bond investors about its underfunding of the state’s two largest pension plans.

In related news, the Illinois Policy Institute’s project NoPensionBailout.com is seeking signatures to oppose any effort by the federal government to bail out the Illinois pension system. They include a map of which states would win and lose in such a massive bailout.

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