On Monday, the Securities and Exchange Commission charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations.
Illinois agreed to settle the charges, the SEC said. The agency said that the state implemented a number of remedial actions and issued corrective disclosures beginning in 2009.
In reaching a settlement, the Commission considered these and other remedial acts by Illinois and its cooperation with SEC staff during the investigation. Without admitting or denying the findings, Illinois consented to the SEC’s order to cease and desist from committing or causing any violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, the SEC said.
Giving an overview of the findings of its investigation that led to the settlement, the SEC said that Illinois failed to inform investors about problems with its pension funding schedule, while the state offered and sold more than $2.2 billion worth of municipal bonds between 2005 and 2009.
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 SEC continued.
Investors were also misled about the effect of changes to Illinois’ statutory plan, the SEC said.
“Municipal investors are no less entitled to truthful risk disclosures than other investors,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement, in an SEC announcement. “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.”
The SEC said the Illinois enforcement action marks the second time that the SEC has charged a state with violating federal securities laws in their public pension disclosures. The first instance occurred in 2010, when the SEC charged New Jersey with misleading municipal bond investors about its underfunding of the state’s two largest pension plans.
Commenting in the Illinois announcement, Elaine Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, said that public pension disclosure by municipal issuers continues to be a top priority of the SEC unit.
The SEC’s cease-and-desist order details of the Illinois situation, noting that 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 SEC said that 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 statement said.
Further details are available in the SEC order posted on the federal regulators’ website.
Source: Securities & Exchange Commission