SEC Pursues Illinois for Its Critically Underfunded Pension

(January 25, 2011) — The US Securities and Exchange Commission (SEC) has 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 has focused 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.”

“Illinois is much like other states not keeping up with its annual payments to their fund,” Pew Center spokesman Stephen Fehr told aiCIO in November, after a report by the Pew Center on the States showed that, while more states are taking action to reduce pension liabilities, states continue to be in a severe fiscal crunch because they’ve been promising more in retirement benefits than they’re able to pay, resulting in an alarming $452 billion total deficit for state and local governments in fiscal 2008. “They’ve been increasing benefits to public employees without thinking how they are going to pay for them in the future,” he said. “It’s not just the recession that caused this problem — Illinois didn’t manage their pension bill in good times and bad, and its not a problem that will get better anytime soon,” he said, noting that the pension deficit around the nation has led to severe underfunding in other state programs to make up for mismanagement.

“It took years for states to get into their current pension predicament, and it will take years for reforms and fiscal discipline to get them out,” the Pew brief indicated. Pew added that winners in state legislatures and governors’ mansions following this month’s elections “will take office having promised to improve how their states will handle these bills coming due.”

The inquiry into Illinois’ pension reflects the heightened effort by the SEC, which even announced a special unit for investigating state pension disclosures last year, to seek greater financial disclosure from 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.