Illinois Attracts $3.7 Billion to Plug Pension Shortfall

(February 24, 2011) — Illinois has found many buyers for its $3.7 billion in bonds, which will fund the year’s contributions to the state’s underfunded pensions.

Even with the high cost of the debt for the nation’s worst-funded pension, the sale represents a relief to the muni bond market, signaling that investors are open to funding even the most cash-strapped states. “This shows that the deal was oversubscribed and highly sought after,” Steve McLaughlin, executive director at Municipal Market Advisors, told aiCIO. “Because of the safeguards to bondholders — the constitutional law that they be paid first — this was a very secure investment,” he said, noting that the deal is good news for the nation’s underfunded schemes, which will likely have access to capital markets and sought after debt.

According to the Wall Street Journal, the deal drew $6.1 billion in orders from 129 investors. The newspaper reported that $520 million in orders came from oversees buyers ranging from sovereign wealth funds to insurance companies.

The state is set to pay interest rates between 4.026% (for bonds maturing in 2014) and 5.877% (for bonds maturing in 2020).

Illinois is rated A1 by Moody’s Investors Service, ranking it alongside California for the agency’s lowest rating among the 50 states.

Illinois’ public statement about its unfunded pension liability of about $83 billion is now being investigated by the Securities and Exchange Commission (SEC). The inquiry reflects the heightened effort by the SEC, which even announced the formation of a special unit for investigating state pension disclosures last year, to seek greater financial disclosure from state pension funds nationwide. In August 2010, for example, the SEC initiated its first action against a state, accusing New Jersey of securities fraud and claiming that when New Jersey issued $26 billion in bonds between 2001 and 2007, it fraudulently and erroneously portrayed its pension funds as adequately funded.

In October of last year, four former San Diego officials agreed to pay financial penalties to settle SEC charges accusing them of misleading municipal bond investors about the city’s fiscal problems. The suit accused the city’s officials of failing to disclose the size of the San Diego City Employees’ Retirement System’s (SDCERS) unfunded pension liability when the city sold bonds.