SEC Charges Illinois With Pension Funding Fraud

Illinois' state employee pension system faces a $100 billion hole that is growing by $17 million per day, The Associated Press reported in January.

Elaine Greenberg, chief of the SEC's Municipal Securities and Public Pensions Unit, added in the same statement that "regardless of the funding methodology they choose, municipal issuers must provide accurate and complete pension disclosures including the effects of material changes to their pension plans. Public pension disclosure by municipal issuers continues to be a top priority of the unit."

According to the SEC's order instituting settled administrative proceedings against Illinois, the state established a 50-year pension contribution schedule in the Illinois Pension Funding Act that was enacted in 1994. The schedule proved insufficient to cover both the cost of benefits accrued in a current year and a payment to amortize the plans' unfunded actuarial liability. "The statutory plan structurally underfunded the state's pension obligations and backloaded the majority of pension contributions far into the future. This structure imposed significant stress on the pension systems and the state's ability to meet its competing obligations—a condition that worsened over time," the SEC found.

The SEC's order finds that Illinois misled investors about the effect of changes to its funding plan, particularly pension holidays enacted in 2005. "Although the state disclosed the pension holidays and other legislative amendments to the plan, Illinois did not disclose the effect of those changes on the contribution schedule and its ability to meet its pension obligations. The state's misleading disclosures resulted from various institutional failures. As a result, Illinois lacked proper mechanisms to identify and evaluate relevant information about its pension systems into its disclosures."

For example, "Illinois had not adopted or implemented sufficient controls, policies or procedures to ensure that material information about the state's pension plan was assembled and communicated to individuals responsible for bond disclosures. The state also did not adequately train personnel involved in the disclosure process or retain disclosure counsel," the SEC says.

According to the SEC's order, Illinois took multiple steps beginning in 2009 to correct process deficiencies and enhance its pension disclosures.