SEC to Investigate Rhode Island Pension Over Concerns About Disclosure

The US Securities and Exchange Commission (SEC) has signaled plans to investigate Rhode Island's pension, which has an unfunded liability of $5 billion.

(February 25, 2011) — Federal financial regulators have indicated that they plan to scrutinize whether Rhode Island disclosed an adequate amount of information to investors about that state’s pension.

With an unfunded liability of $5 billion, the US Securities and Exchange Commission (SEC) has requested a list of all bond transactions from the state since 2007 that included disclosures about state retirement plans, the Providence Journal reported. Rhode Island General Treasurer Gina M. Raimondo has said that the demands by the SEC are expected, given her own efforts last month to improve transparency in the face of growing worries about public pensions and their impacts on government budgets nationwide.

A November report issued by the Pew Center on the States has shown that Rhode Island is among the worst states for its unfunded pension liability. The state, along with Arizona, California, Illinois, Maryland, Michigan, New Jersey, New Mexico, South Dakota, and Utah, has reduced employee benefits this year. Earlier last year, in a report titled “The Trillion Dollar Gap,” Pew said pension deficit would have to be paid over the next 30 years by state and local governments, amounting to more that $8,800 for each household in the US.

“While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states’ inability to save for the future and manage the costs of their public sector retirement benefits,” said Susan Urahn, managing director of the Washington-based policy research organization, in a news release. “The growing bill coming due to states could have significant consequences for taxpayers — higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms.”

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The SEC’s move to scrutinize Rhode Island’s underfunded scheme reflects the greater effort by the SEC, which even announced a special unit for investigating state pension disclosures last year, to seek heightened financial disclosure from funds around the country. In January, the SEC launched an investigation into public statement by Illinois officials regarding the state’s massively underfunded pension fund — known as the worst-funded pension system among US states. According to the Wall Street Journal, the inquiry is focusing its attention on “public statements concerning an overhaul measure passed in 2010 meant to help shore up the retirement system.” The governor’s spokeswoman, Kelly Kraft, told the WSJ: “We are fully cooperating” with the inquiry. We feel our disclosure was always accurate and complete.”

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.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Illinois Attracts $3.7 Billion to Plug Pension Shortfall

Despite Illinois’ financial troubles, the state has received $6.1 billion in orders from a record 129 investors.

(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).

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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.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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