SEC to Investigate Rhode Island Pension Over Concerns About Disclosure

(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.”

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.