SEC Finding on Illinois Pension Cover-Up: a Warning to Other States
The United States Securities & Exchange Commission determined that the State of Illinois violated Federal Securities Laws by misstating the true financial health of the State's depleted pension funds when it raised over $2.2 billion with multiple bond offerings from 2005 through early 2009.
The SEC blamed the State’s historical failure to fund its pension systems caused the pension to be only 43% funded and the State exposed to an $83 billion unfunded liability. Former Democratic Governor from 2003 to 2009, Rod Blagojevich, was unable to provide any comment.
In March of last year he began serving a 14-year sentence in Federal prison for conviction on unrelated charges for soliciting of bribes while in public office for political appointments including the vacant U.S. Senate seat of President Barack Obama.
The State of Illinois funds five retirement systems that pay defined-benefit pension payments upon retirement, death, or disability to public employees and their beneficiaries. The systems include the Illinois State Teachers’ Retirement System, State Universities Retirement System, the State Employees’ Retirement System, Judges’ Retirement System, and the General Assembly Retirement System.
The pension plans were required by law collect contributions from employees and employers, but the State chose to subsidize employees by paying most of the required contributions.
In 1994 the pension plans were significantly underfunded. Rather than requiring the immediate funding of through direct contributions, the Illinois Legislature passed the Pension Funding Act (“Funding Plan”) to establish a 50-year pension contribution schedule that allowed the State to slowly increase pension contribution increases over a fifteen-year “ramp” period, then make a large percentage annual payroll contribution each year from 2011 to 2045.
The SEC found that the State of Illinois failed to disclose to investors “material information” regarding the continuous underfunding of their pension systems and the resulting risks to the State’s financial solvency. The scheme underfunded the State’s pension obligations in the early years and back-loaded the majority of pension contributions far out into the future. The Funding Plan also allowed the State to take “Pension Holidays” with no funding during 2006 and 2007. The State of Illinois hid from investors the effect of these funding changes on their ability to pay pension obligations.
In anticipation of the institution of potential civil and criminal charges, the State of Illinois submitted an Offer of Settlement that admitted wrongdoing and consented to an SEC “Cease-and-Desist” Order for violating the Securities Act of 1933.
In what is a direct warning to other state and local public pension plans; SEC Enforcement Director George S. Canellos stated: “Municipal investors are no less entitled to truthful risk disclosures than other investors.”
Elaine Greenberg, Chief of SEC Municipal Securities and Public Pensions Unit, added, “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. Public pension disclosure by municipal issuers continues to be a top priority of the unit.”
Although agreeing to the securities fraud doesn't subject the State to any SEC fines or penalties, it provides a road-map for class-action lawsuits against the State of Illinois for financial misdeeds.
A spokesman for Illinois Governor Quinn's budget office said Illinois has "cooperated fully" with the SEC during its inquiry and “neither admits nor denies the findings in the order.” Given the dubious funding level of public pension plans in states like California, politicians and public pension executives had better start “lawyering-up”.