Heads we win, tails you lose


This case is remarkable for its blatant immorality on the part of public officials. The state of Illinois was found to have deliberately misled buyers of its municipal bonds. This is known as securities fraud and guilty parties in the private sector are fined heavily and often go to jail. But in the public sector it earns a reprimand and no criminal sanctions? The SEC claims it doesn’t want to punish Illinois taxpayers with fines, but how about prosecuting the responsible public officials, with some serious jail time if found guilty???

Illinois? That’s the state that gave us Rahm Emmanuel and Barack Obama, right? Article from the WSJ:

SEC Says Illinois Hid Pension Troubles


For years, Illinois officials misled investors and shortchanged the state pension system, leaving future generations of taxpayers to foot the bill, U.S. securities regulators allege.

The Securities and Exchange Commission on Monday charged Illinois with securities fraud, marking only the second time the agency has filed civil-fraud charges against a state.

But the agency and the state also announced that a settlement had already been reached in which Illinois won’t pay a penalty or admit wrongdoing.

The action was part of a broader push by the SEC to bring greater transparency and accountability to the municipal-bond market, as the agency alleged the state failed to adequately disclose to investors the risks of its underfunded pensions systems.


The action also shows in detail how political decisions left the state with only 40 cents of assets for every dollar of pension liabilities—a financial hole Illinois officials are now scrambling to fill.

Yet no matter how harmful the pension practices were to the state’s finances, SEC officials say they could only pursue charges against Illinois for what it failed to tell bond investors, who bought bonds worth $2.2 billion.

Most states comply with governmental accounting standards, which “Illinois did not follow,” Elaine Greenberg, head of the SEC’s municipal securities and public pensions unit, said in an interview. “But the SEC cannot order a state to follow any particularly methodology.”

Governor Pat Quinn’s Office of Management and Budget said the state has been working to enhance its disclosure practices since 2009.

States and cities across the U.S. face high pension costs. Rallying investment returns have helped make up the shortfalls at some plans, but others have cut benefits to workers to fill the deficit.

Illinois has one of the most underfunded pension systems in the U.S.

The SEC’s 11-page, cease-and-desist order reveals new details about the financial and legislative practices that led to the state’s current predicament.

The state’s five public-employee pension plans manage the retirement benefits for clerical workers, teachers, judges, college professors and lawmakers. Collectively, their funding level stands at 40%. Nationally, the average funding level is about 75%.

The SEC settlement comes as Mr. Quinn, a Democrat, has pushed repeatedly to overhaul the state’s pension system. Spiraling pension costs threaten to crowd out spending on other state services and are a major factor in Illinois’s low credit rating. Standard & Poor’s Ratings Services cut Illinois’s rating one notch to A- in January, making it the lowest-rated U.S. state by S&P.

“This is one more weight on the scale,” Illinois State Senator Daniel Biss, a Democrat, said of the SEC order.

But an overhaul, which could result in deep cuts for current workers and retirees, has remained elusive. Workers have argued that they shouldn’t bear the burden for past mistakes. [Wrong. These workers are now reaping the gains of past mistakes. Economists call these wages and benefits monopoly rents. Labor contracts are contracts, not entitlements.]

The problems date back to 1994, when Illinois lawmakers passed a funding plan that would allow the state to amortize, or spread the pension costs, over 50 years. Most pensions use a 30-year amortization period.

State officials also ignored the common practice of calculating contributions to the plans based on what is known as the “Actuarially Required Contribution.”

Instead, Illinois left it to lawmakers to decide how much to contribute to the funds each year.

In some years, the state took “pension holidays,” lowering its planned pension contributions by about half.

By 2009, actuaries and a consultant hired by the state began warning that the underfunding could lead to the system’s insolvency, according to the SEC order.

The consultant said in a document that the state’s pension system was so underfunded that it would likely “never be able to afford the level of contributions” required to reach 90% funded.

Yet, these concerns weren’t disclosed to investors in bond-offering documents, the SEC said.

As it prepared its bond documents, the state made little effort to collect “potentially pertinent” information from the pension system’s actuaries, the SEC said.


The state said it had worked to improve its practices after the SEC cited New Jersey for pension-disclosure issues in August 2010.

The SEC accused New Jersey of allegedly misleading investors that the state was adequately funding two of its pension systems—the agency’s first securities-fraud case against a state. The SEC said the state didn’t disclose that it had abandoned a five-year plan to fund the pension plans. New Jersey neither admitted nor denied wrongdoing but said it would improve its disclosures.

When New Jersey settled with the SEC, it didn’t pay a fine, either. The SEC often doesn’t fine governments because the costs are ultimately borne by taxpayers, according to people familiar with the agency’s practices. In its Illinois order, the SEC noted that the state had taken steps to improve its disclosures, including the creation of a special “disclosure committee” that will sign off on bond-offering disclosures.

Illinois expects to sell approximately $500 million in bonds in early April, a state official said Monday. The sale was put off in January when S&P downgraded the state’s credit rating.

The SEC’s action on Monday was unlikely to spur changes in the state, Mr. Biss and other lawmakers said.

The order applies to alleged securities fraud from 2005 to 2009, not current practices. Pressure from credit-rating firms hasn’t prodded lawmakers toward a consensus, leaving some legislators to doubt whether Monday’s order would, either.

Many lawmakers agree the pension system needs to be overhauled, Mr. Biss said, but disagree on the best way to do that. “The hardest questions now aren’t whether but what,” he said.


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