For the second time in history, federal regulators accused a U.S. state of securities fraud Monday, ordering Illinois to stop misleading investors about the condition of its public pension system.
In announcing a settlement with the state, the Securities and Exchange Commission said Illinois had passed a law in 1994 allowing itself to put less than the required amount into its pension system each year. For the next 15 years, the state issued annual reports showing that it was on track with its lawful schedule, even as it fell further behind the real-world amount needed to pay all public retirees their benefits. In 2005, the state passed another law giving itself a holiday from even the inadequate amounts on the schedule.
From 2005 to 2009, Illinois issued $2.2 billion worth of municipal bonds, which the SEC said were marketed under false pretenses. There was a growing hole in the pension system, putting increasing pressure on the state’s finances every year. That raised the risk that at some point retirees and bond buyers would be competing for the same limited money. The risk grew greater every year, the SEC said, but investors could not see it by looking at Illinois’ disclosures.
In effect, that meant investors overpaid for bonds of a lower quality than they were made out to have, although the SEC did not measure any loss.