Illinois became the second state to settle with the U.S. Securities and Exchange Commission over charges it misled investors about a growing shortfall in its employee pension funds as it sold $2.2 billion in bonds.

From 2005 to 2009, Illinois failed to disclose the degree of underfunding for the plans, the SEC said yesterday. The state didn’t adequately disclose cuts in its annual payments to buoy the funds, according to the SEC. Its pension debts swelled as the state borrowed and used accounting techniques that delayed for years steps to shore up the financing, the agency said. 

The SEC has been cracking down on faulty disclosure by state and local governments that borrow in the $3.7 trillion municipal-bond market. It settled a similar case with New Jersey in 2010, the first time the regulator targeted a state. 

“Municipal investors are no less entitled to truthful risk disclosures than other investors,” George S. Canellos, acting director of the SEC’s Enforcement Division, said in a statement. “Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system.” 

The state neither admitted nor denied the SEC’s findings in the settlement, which didn’t include any fines or penalties, according to a statement from Democratic Governor Pat Quinn’s budget office. 

Hopeless Hole 

The SEC said that a consultant to the governor’s office in August 2009 wrote that the pension system was so underfunded that the state probably would never reach 90 percent funding. Ensuring that the funds had enough assets to cover 90 percent of promised benefits by 2045 was a goal of a 1995 plan that led to years of underfunding, which the SEC says wasn’t mentioned in bond-sale documents.

“The state knew that the plan was unmanageable, but failed to disclose the significant risks to those who bought its bonds,” Elaine Greenberg, the Philadelphia-based head of the SEC’s municipal and pension enforcement unit, said in an interview. “We hope that our heightened scrutiny of pension disclosure will continue to serve as a warning to other state and municipal issuers.”


Biggest Deficit 

Illinois, which according to data compiled by Bloomberg has the most underfunded public pensions of all U.S. states, is among governments nationwide confronting growing retiree burdens since the 2007 financial crisis and market collapse, which saddled the systems with losses. States and localities have more than $2 trillion in unfunded public-employee retirement obligations, Moody’s Investors Service said in a July report. 

Along with the probe of New Jersey in 2010, the SEC in 2008 accused San Diego officials of failing to disclose key policies contributing to its pension-fund shortfalls. 

“It goes back to an era, which wasn’t that long ago, where there just wasn’t as much attention placed on pension obligations,” said Howard Cure, director of municipal research at Evercore Wealth Management LLC, which oversees $4.5 billion. “You’re not talking about small, infrequent issuers. These are major issuers, names like New Jersey, San Diego and Illinois.” 

Standard & Poor’s lowered its credit rating for Illinois on Jan. 25 to A-, six steps below AAA, after lawmakers were unable to produce a plan to shore up the pensions, which have just 39 percent of assets needed to cover projected obligations. It’s the lowest-rated U.S. state. 

Scuttled Sale 

Illinois, the nation’s fifth-most-populous state with about 13 million residents, delayed a $500 million general-obligation bond sale five days after the S&P cut. 

A taxable Illinois pension-obligation bond sold in 2003 and maturing in 2033 traded today at an average yield of 5.23 percent, the lowest since March 7, according to data compiled by Bloomberg. 

Laurence Msall, president of the Chicago-based Civic Federation, a nonprofit group that tracks government finance, said that inaction on changing the pensions was “of greater concern” than the SEC claims. “The legislature has yet to take up pension reform in a very significant way and almost $100 billion in unfunded liability is swallowing the state budget,” Msall said. 

Steve Brown, a spokesman for Speaker Michael Madigan in the House of Representatives, said the Chicago Democrat would have no comment on the settlement. 

Stretched Timeframe 

The SEC case centers on a 1995 plan that gave Illinois half a century to provide enough money to the pensions to pay for 90 percent of promised benefits.

The state slipped deeper into the hole, adding $57 billion to the shortfall from 1996 through 2010. The increase was driven primarily by the failure to put added taxpayer money into the fund, abetted by accounting techniques that pushed financial pressures into the future.

Illinois changed the plan again in 2005, allowing it to further cut its contributions. So-called pension holidays approved by the legislature allowed Illinois to cut its contributions by about half in 2006 and 2007. 

Illinois Comptroller Judy Baar Topinka said in a statement from her Chicago office that the state had done the right thing by moving to improve disclosures. 

“We will all be paying for the mishandling of the pension funds for many years to come,” she said. “It is critical that we learn from the state’s mistakes and never again play games with our pension systems.” 

To contact the reporters on this story: William Selway in Washington at


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