(March 11, 2013) — The state of Illinois has settled a securities fraud case brought against it by the US Securities and Exchange Commission (SEC) over allegedly misrepresenting the health of its pension system.
The Illinois Governor’s Office of Management and Budget announced the settlement today, which ends the SEC’s investigation of pension disclosures made by the state during bond offerings between 2005 and early 2009.
The SEC says it discovered that Illinois failed to inform investors about the magnitude of problems with its pension funding schedule as the state sold more than $2.2 billion in municipal bonds.
“Municipal investors are no less entitled to truthful risk disclosures than other investors,” said George Canellos, acting director of the SEC’s enforcement division, in a statement. “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 state’s five pension systems are the second-worst funded in the country—next to Kentucky’s—with a shortfall of roughly $97 billion.
According to both the SEC and governor’s office, Illinois began taking remedial actions in 2009 to correct “process deficiencies” and has issued corrective disclosures about the true state of the pension system.
The governor’s office says these actions include the retention of a single law firm to act as disclosure counsel, providing “consistent, proactive and continuing review of the state’s bond disclosures.” Furthermore, the state reports that it has adopted formal policies to review of pension disclosures by the pension systems themselves.
Before these measures were in place, the SEC claims that Illinois misled investors by disclosing pension contribution holidays but not the effect of them on the state’s ability to meet its substantial pension obligations.
“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,” said Elaine Greenberg, head of the SEC’s municipal securities and public pensions unit. “Public pension disclosure by municipal issuers continues to be a top priority of the unit.”
This case marks the second time that the SEC has charged a state with violating federal securities law for their pension disclosures. In 2010, the regulator brought a similar charges against New Jersey, again alleging the state misled potential municipal bond investors about the funded status of its two largest public plans.
New Jersey settled the suit in short order by agreeing to make changes to its disclosure practices, and was not required to admit guilt or pay a penalty.
The dust-up between New Jersey and the SEC motivated Illinois state officials to proactively hire legal counsel and enhance its pension disclosures when offering municipal bonds to investors, according to the governor’s office.
Illinois, like New Jersey, settled the case without having to admit or deny the SEC’s findings.
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