The Wall Street Journal has a must-read story today about the Securities and Exchange Commission charging the state of Illinois with securities fraud. It was only the second time that the SEC has ever charged an entire state. (New Jersey has the dubious distinction of being the first.)
Illinois was found to have “misled investors and shortchanged the state pension system, leaving future generations of taxpayers to foot the bill.” Investors bought $2.2 billion of the state’s municipal bonds not knowing the state had put away only enough to cover 40 percent of its liabilities.
The Journal reports:
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.
Illinois has already settled with the SEC. Securities fraud is a pretty big deal. So, are some stiff penalties on the way for the officials that perpetrated this fraud? Nope. That settlement includes no fines or penalties. No admission of guilt either. Nor does it appear that anyone will serve any time (The story doesn’t mention any).
The Journal explains:
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.
That the costs would be borne by taxpayers is almost certainly correct. But it points to the real danger here with these public employee pension programs: There isn’t an effective deterrent to stop states from doing this. That mean we likely haven’t heard the last of this problem. Illinois may be the tip of the iceberg in terms of fraud.
More Washington Examiner reporting on the pension crisis in Illinois can be found here, here and here. If you are not already depressed enough, you can tread about the broader pension funding crisis here, here, here and here.