The SEC has charged the state of Illinois with securities fraud for misleading municipal bond investors about the state's approach to funding its pension obligations.
On Monday, the SEC said it conducted an investigation that revealed 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.
Illinois also failed to disclose that its statutory plan significantly underfunded the state's pension obligations and increased the risk to its overall financial condition and misled investors about the effect of changes to its statutory plan, the SEC said.
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Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC's charges, the agency said.
According to the SEC's order instituting settled administrative proceedings against Illinois, the state 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 back-loaded the majority of pension contributions far into the future. The SEC said this structure imposed significant stress on the pension systems and the state's ability to meet its competing obligations, which worsened over time.
The SEC said among the steps to correct process deficiencies and enhance its pension disclosures, Illinois improved disclosures in the pension section of its bond offering documents, retained disclosure counsel, and instituted written policies and procedures as well as implemented disclosure controls and training programs.
The SEC said the Illinois enforcement action marks the second time that the agency 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.
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