Illinois Leans on SWFs to Relieve Pension Debt

(February 14, 2011) — Illinois, widely regarded as the worst-funded pension system among US states, is attempting to convince sovereign wealth funds to buy nearly $4 billion of bonds so that it can pay off its pension debt.

States have recently faced heightened worries about their underfunded public pension liabilities, estimated at between $700 billion and $3 trillion. However, borrowing from sovereign wealth funds to help fund Illinois’ pension costs is a risky and controversial move that could result in higher taxes in the future. The state is expected to have to pay a high interest rate when it sells $3.7 billion in taxable debt for its public employees’ pension system this week, the Wall Street Journal reported.

John Sinsheimer, the state’s director of capital markets, has been targeting investors in Europe and Asia while also trying to raise money from large banks and insurance companies in the US, according to the Financial Times.

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.