The SEC charged the State of Illinois with misleading
investors when selling about $2.2 billion in municipal bonds over a four year
period beginning in 2005. The proceeding alleges violations of Securities Act
Sections 17(a)(2) and (3). In the wake of substantial remedial steps initiated
by the State of Illinois beginning in 2009 and its cooperation during the
investigation, the proceeding was resolved with a consent to the entry of a
cease and desist order based on the Sections cited in the Order. In the
matter of State of Illinois, File No. 3-14237 (March 11, 2013).
The action centers on the chronic underfunding of
Illinois' pension plans for state workers. In 2011 the Illinois pension systems
were, collectively, underfunded by about $83 billion. System assets covered only
about 43% of its liabilities. This deficiency is rooted in years of chronic
underfunding. Until 1981 the State funded pensions by paying the benefit
obligations as they became due. This approach was abandoned in 1982. Over the
next thirteen years contributions remained constant. In the face of rising
costs however the system was underfunded by about $20 billion by 1995 when it
had assets sufficient to cover only about half of the obligations.
In 1994 the State Assembly passed legislation designed to
rectify the situation. Essentially the statutory plan called for achieving a
90% funded ration for each system by 2045. Part of the plan called for the
State's contributions to ramp up over a fifteen year period. This permitted
Illinois to shift the burden associated with its pension costs to the future,
creating a structural underfunding. From 1996 through 2010 the unfunded
liability increased by $57 billion. Significant financial stress resulted.
In its bond offering documents the State disclosed the
Illinois statutory funding provisions. The documents did not disclose the fact
that the contributions required by the statutory plan significantly underfunded
the State's pension obligations. Likewise, the fact that pension funding was
deferred into the future was not disclosed.
Beginning in 2005 the State amended the statutory plan,
lowering the contributions or it borrowed to cover the payments. Although the
basic facts were disclosed, the State did not inform investors that these
actions exacerbated the structural underfunding, according to the Order. This
resulted from the fact that the State failed to adopt or implement sufficient
controls, policies, or procedures to ensure that material information was
collected and disclosed.
In 2009 the State undertook to reform the system. In June
of that year a Modernization Task Force was created. New personnel have been
retained. Following the resolution of this action the State began implementing
a series of remedial measures.
This is the second action brought by the Commission
against a state focused on the failure properly disclose pension obligations in
municipal bond offerings. The first was brought against the State of New Jersey
three years ago. In the Matter of State of New Jersey, Adm. Proc. File
No. 3-14009 (Aug. 18, 2010). There, however, the Order alleged that the State
created the "illusion" that a statutory plan was being implemented to fund the
obligations. In fact the state knew that the funding plan had been abandoned.
The Order in that proceeding charged violations of the same Sections cited
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